Lifetime Allowance is Bad for the Health of NHS Doctors
8th October 2017
The Financial Times had a front page headline and attention grabber on Friday of ‘NHS Faces Loss of Senior Staff as £1m Pension Cap Pushes Doctor to Retire’ (15th January 2015). I know a few doctors, dentists and senior management of the NHS. I suspect few of them read the Financial Times and I do not think many other publications have properly highlighted the issues certain staff with a long NHS service record, may face in retirement
Those who are fortunate enough to be members of the NHS Final Salary scheme certainly are the lucky ones. The scheme is very generous and I have never recommended a member to leave the pension scheme – I doubt I ever will. However, we see many members who have already accumulated ‘Final Salaries’ of over £40,000 per annum and this will only increase until they do actually decide to hang up the stethoscope and draw on their pension pots.
Since the Lifetime Allowance topped out at £1.8m in the 2011/2012 tax year, this has continually reduced to £1.25m in the current 2015/2016 tax year. From 6th April 2016, the Lifetime Allowance will reduce to £1m. Under current legislation this will remain at this level until the 20172018 tax year, when the Lifetime Allowance increases by CPI. Based on current CPI, this increase will be minimal.
Therefore, any member of the NHS Final Salary Scheme with accumulated benefits of over £1m will potentially be liable to an excess charge of at least 55% on any accumulated benefits over the £1m cap at the point of crystallisation i.e retirement.
So how do they calculate the accumulated benefits for the NHS Final Salary Scheme? Essentially, this is a simple calculation, however there are a number of permutations and too much to discuss in this blog. However, as a rule of thumb, it is 20 times the ‘Final Salary’ plus the tax free cash entitlement. Therefore, if the latest annual pension statement states a final salary of £50,000 per annum and the tax free cash entitlement is £250,000, this equates to a total value for LTA purposes of £1.25m ((£50,000 x 20) + £250,000)).
Whilst the above example is purely illustrated for the sake of round numbers, these levels are simply not uncommon amongst those with a long service record.
Therefore, potentially if the member retired on or after the 6th April 2016, there would potentially be a 55% charge on the excess of £250,000 i.e £137,500. This assumes the excess is taken as a lump sum. Potentially, this could be even higher if the excess is taken as income.
Now, these pension benefits are not to be sniffed at and are very generous compared to other types of pensions, however I would suggest this could lead to some members expecting a larger retirement income than they may actually receive.
Added to this, if a member is not planning to retire immediately, but continue service with the NHS, the new rules regarding the Annual Allowance could also leave some facing another unexpected tax charge. Currently, everyone is able to receive up to £40,000 per annum into their pension and not be liable to an Annual Allowance excess charge. Any contribution over this amount, however could well lead to another excess charge in the form of a reduction in the annual personal allowance.
From the 6th April 2016, the annual allowance reduces to as little as £10,000 if a member has ‘income’ of over £150,000 per annum. In some cases, this can reduce to £110,000 per annum depending on the individuals circumstances. HMRC has made the definition of ‘income’ overly complicated and this in itself needs to be assessed.
Therefore, if the NHS are contributing say the equivalent of £40,000 per annum into the members pension, after tax, this could reduce to the equivalent of £25,000 per annum.
There are potentially ways to reduce this excess charge levy such as entering the ‘Scheme Pays’ system offered by the NHS, applying for Fixed Protection/Individual Protection, utilising the Carry Forward Rules or balancing the hours worked for the NHS with any private work, which the member may be engaged in.
There are a number of different NHS Schemes and the potential scenarios are vast, however I doubt these members are fully aware of the affects these pension changes might have, until of course a higher than expected tax bill lands on the doorstep every year ora member decides to retire.
The above is not meant to constituent advice, just a red flag, a health warning. Each individual member has a different set of circumstances and remaining years of service etc. However, I believe each member should be fully aware before the event.
To assist these members, Keystone Independent has launched a free service to assist you in valuing your NHS pension (and any other pensions you may have) both against the Lifetime Allowance and the Annual Allowance. This is offered without obligation.
The value of pensions can fall as well as rise.
You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
My SIPP and Lifetime payment details, because of the incredible drop in the value of the pound after the vote in 2016 the value of shares has increased dramatically (and of course because interest rates are low).
I have gone over £1.25M by about £116k and I am likely to be charged heavy tax penalties. I would much rather give it to charity!
How are people dealing with this in a tax efficient manner, particularly so that they can give the money to charity.