Should I stay or should I go now? If I go there will be trouble. An’ if I stay it will be double. So come on and let me know . . .’
The Clash were never renowned for their pension advice but their lyrics sum up the dilemma for higher-earning NHS employees and contractors.
The NHS pension rules which came into force in April 2016 have introduced two key changes. The Lifetime Allowance has reduced from £1.25m to £1m. NHS employees and GP’s with benefits that are deemed to exceed this level will pay a tax charge when they take their pension. However the charge is 25% – not the much publicised 55% rate – and it is paid by the pension scheme then recovered from the employee later. In fact the Lifetime Allowance is not the worst problem – it just means that investment growth is effectively reduced.
The Annual Allowance relates to pension growth and a charge is made where growth exceeds it. The Annual Allowance reduced from £50,000 per annum to £40,000 for the year 2014/15 and, from April 2016, will reduce further still for anyone with “deemed earnings” of over £150,000. For every £2 earned above this amount, the allowance will reduce by £1 right down to £10,000 for those earning over £210,000.
To work out your “deemed earnings”, the first stage is to calculate your total income from all sources (NHS, private practice, rental income, dividends etc) less any tax-deductible expenses (pension contributions, trading expenses etc). If this figure is less than £110,000 then no further action is needed and you receive the full £40,000 Annual Allowance.
If the figure exceeds £110,000, a second stage applies which is to add on the calculation of the pension growth. If the total exceeds £150,000 then the Annual Allowance starts to reduce.
Who will be affected?
NHS Consultants with significant private practice income, and GPs with higher incomes – greater than £140,000 of profits as a general guide – are likely to be caught by the new regime.
The impact will not be immediate – it may hit in 2016/17 but more likely in 2017/18.
Increases in inflation will result in additional deemed growth in the pension benefits so it’s not just earnings to watch for.
You can either pay the tax bills yourself or there is a Scheme Pays option which allows the pension scheme to pay the tax and then recover it off your final pension. Either way, be prepared for some impact. If you have switched to the 2015 scheme then you could end up with a tax charge on both the 2015 and 1995 components – and the Scheme Pays option may not cover all of it.
Additional pension savings – added years, AVC contracts and private pension schemes – need some urgent review to assess whether these should continue. They are likely to contribute to Annual Allowance charges as well as potentially increasing the risk of a Lifetime Allowance charge.
Consultants who get a large pay increment need to ask the payroll department to look at the Annual Allowance impact and request a Pensions Savings Statement from NHS Pensions.
GPs may need to consider alternative trading structures for work outside of the Partnership. At the same time, be wary of new legislation restricting how personal service companies can be used in the public sector – simply setting up a limited company now could have significant pitfalls ahead.
Remember though that the scheme has significant benefits – particularly the fact that the employers pay a large contribution. There are also reduced ill health and life assurance benefits if you are no longer an active member of the scheme.
Certainly tax implications should not be the sole driver in decision making. Individual financial and family circumstances are important and clients’ personal retirement plans and attitude to investment risk will vary. While Hall Liddy can advise on the tax implications, we recommend that you also discuss the options with your Independent Financial Advisors.
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