I know my public sector pension is great, but I can’t afford it

On a starting salary of about £29,000, giving him take-home pay of about £2,000 a month, finding another £225 a month to contribute to a pension was impossible. “I understand it’s a generous scheme but it’s too tight at my basic pay. It’s quite a squeeze to pay into my pension on top of rent and bills,” he said.

Habad said he hopes to opt back in within the next two years if his salary allows it, or if he was placed at a hospital where he could live with his family and save on rent.

Thousands are opting out of similarly generous defined benefit (DB) pensions. These schemes, now very rare outside the public sector, are also known as final salary pensions because they pay a guaranteed income in retirement, linked to your level of pay. Despite the obvious benefits of such schemes, which often take into account inflation and so guarantee a reasonable level of income, many public sector workers are struggling to afford contributions.

NHS and teachers’ pension data obtained by the Sunday Times through a Freedom of Information request show an increase in opt-outs since the cost of living crisis began in 2021, particularly among the young and lower paid.

Some 75,421 NHS workers opted out of their pension scheme in the 2023-24 financial year, up 72 per cent from the 43,732 who opted out in 2020-21. Those quitting the Teachers Pension Scheme (TPS) went up 35 per cent over the same period, to a total of 10,825 in 2023-24.

About 70 per cent of the NHS workers leaving the scheme and 67.5 per cent of teachers were under 40, according to official data. The NHS scheme has 2.08 million active members contributing and the TPS just over 800,000.

Neither scheme allows workers to reduce their contributions. Once they have stopped paying inthey get the chance to rejoin after a year and will be automatically re-enrolled after three years.

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Claire Reindorp from the Young Women’s Trust charity said: “At a time when many are struggling to pay their bills and put food on the table it’s no surprise that pension schemes, despite generous employer contributions, are the last priority on the list when it comes to budgeting.”

Public sector pay and pensions are in the spotlight with doctors voting on whether to strike from July over pay and a spat between the United Learning schools trust and the Department for Education and unions over proposals to give teachers the chance to opt out of the TPS in exchange for a less generous pension and higher pay.

Tom McPhail, a pensions consultant, said: “We have this daft situation where nurses are having to go to food banks but they’re going to be really well-off in retirement. If you asked lower-paid, younger workers, ‘Should we shift the balance between pay and pensions?’ I think a lot would be receptive to that.”

The price of better pensions

DB schemes have largely disappeared from the private sector because they are so expensive for companies to provide. Most employees save into defined contribution (DC) schemes, where the size of your pension pot at retirement depends on how much was paid in and how your investments performed. There is no guaranteed income.

Under the rules of auto-enrolment, which has guaranteed that most employees now have a workplace pension, DC pension holders contribute at least 5 per cent of their qualifying earnings (income between £6,241 and £50,270), and employers pay in 3 per cent.

By contrast NHS workers contribute between 5.2 per cent and 12.5 per cent of their full earnings, and their employer pays in 23.7 per cent. Teachers contribute between 7.4 per cent and 12 per cent, and their employer pays 28.7 per cent.

The trade-off is that public sector pay is often lower — the average salary in February was £36,140 compared with £37,492 in the private sector.

Steve Webb, a former pensions minister who is now a partner at the consultancy Lane Clark and Peacock, said contribution rates were high relative to worker’s salaries and inflexible, despite being generous.

“If you are a young teacher or other public servant on a modest wage and saving for a house deposit, a pension that you will benefit from in nearly half a century can seem a lot less important than the desire to move out of rented accommodation or your parents’ house,” he said.

Lewis Rolfe, an English teacher, opted out of the TPS about ten years ago when he took a £12,000 pay cut and putting £120 a month into his pension became unaffordable. Rolfe, 41, from north London, said: “I needed all the money I could get. The amount I saved on contributions was the difference between being able to put a few months of savings aside or not.”

Although his salary has gone back up, Rolfe, who is married with a seven-year-old daughter and twin girls aged two, still can’t afford to rejoin the scheme. He said: “I have quite a lot on my plate and I would rather have the money now.

“My attitude is that whatever I paid in before opting out is there, and I’ll get the state pension, so I think I’ll be OK. I’m not completely against going back in, but with the kids the age they are, now is not the right time.”

Pension versus pay

Campaigners say that public sector workers’ benefits should be rebalanced, with less emphasis on generous pensions and more on pay.

“Employees don’t respond to the financial promises of a pension in the same way that they respond to a higher salary,” said Jonathan Cribb from the Institute of Fiscal Studies, a think tank. “They would rather have an extra £1,000 pay than an extra £1,000 in pension payments.”

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Cribb suggested that employee contributions and pension benefits could be reduced to raise take-home pay, or employer contributions could be cut and the money used to fund higher salaries.

The United Learning academy trust, which runs about 90 schools, has proposed that teachers could swap their TPS pension for a DC scheme into which they could contribute either 0, 5 or 10 per cent of their salary.

The trust would contribute at least 10 per cent, and the savings it made would be funnelled into higher salaries. Under these plans a starting teacher’s salary outside London could rise from £32,850 to £38,000 a year, it said.

There is evidence that some teachers would welcome this. The Education Policy Institute, another think tank, and the survey app TeacherTapp, asked 5,750 teachers and found that 28 per cent of those aged 20 to 29 would trade some of their pension for a higher salary, compared with 14 per cent of those aged 40 to 49.

Private schools can offer alternative pensions to the TPS, but state schools and some academies cannot. The Education Policy Institute said more schools should be able to run their own schemes.

Where would this leave essential workers?

Graham Crossley, a public sector pension specialist at the wealth manager Quilter, looked at the effect the United Learning proposals would have on a teacher’s overall wealth across their career.

In the TPS, a teacher accrues a retirement salary of 1.75 per of their earnings for each year worked. Say they earned the starting pay of £32,850, which went up 4 per cent a year for 30 years, giving them a final salary of £102,447. They would have earned a total of £1.6 million after pension contributions but before tax and would have a guaranteed TPS income of £41,265 a year, rising in line with inflation.

If they instead started on the higher salary of £38,000 and paid 10 per cent of their qualifying earnings into a DC scheme, matched by their employer then after 30 years their final salary would be £118,506. They would have earned a total of £2 million after pension contributions but before tax and their pension pot would be worth £542,292, assuming 5 per cent annual investment growth. Quilter said this pot could provide an annual income of £17,841, assuming 3.2 per cent withdrawals a year.

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In both cases the teacher would also get the state pension, which is worth £11,973 at the moment, if you have 35 full years of national insurance contributions.

Martin Willis from the pensions consultancy Barnett Waddingham said that giving public sector employees more options could be a good thing, if the trade-offs were explained. He said: “Public sector DB schemes are very valuable but can be inflexible and not all people will value all the benefits.

“But these are complex decisions and any choice would have to be accompanied by careful and balanced information because people saving less now will generally have less in retirement.”