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Understanding the NHS pension review
As a member of the NHS pension scheme you will be accruing benefits according to a set formula, although from time to time an NHS pension review will occur which changes certain elements of the scheme. If you are concerned about the effect that changes in NHS pensions contributions will have on your annual pension accrual you should seek a specialist source of NHS pension advice.
The Government have recently conducted an NHS pension review which has resulted in significant changes to public sector pension schemes which will affect virtually all doctors. In addition there have been significant tax changes, which are beginning to impact on annual pension accrual and the tax relief received from making these contributions.
This has led the NHS pension advice agency to issue annual pension statements to members of the pension scheme which enables NHS employees to prepare for potential tax issues arising from pension accrual. The NHS pension advice will prevent doctors from breaching the Lifetime Pensions allowance.
Consequences of the NHS pension review
As a consequence of the NHS pension review virtually all NHS doctors will have to analyse their pension position every year to ensure:
- Their lifetime allowance does not exceed the current lifetime allowance limit (2018/19) of £1,030,000.
- They do not breach the allowance for pension accrual in each tax year (Known as the Annual Allowance)
Is your Lifetime allowance a Life Sentence
Pension Lifetime Allowance
The Lifetime Allowance is a limit on the value of pay outs from your pension schemes – whether lump sums or retirement income – that can be made without triggering an additional tax charge.
The Lifetime Allowance is currently £1,030,000 (2018/19).
If all your pension funds taken together have a value in excess of £1,030,000 in 2018/19 when amounts are paid out of the schemes (known as a “benefit crystallisation event”), you will be taxed on the excess over £1,030,000.
The tax payable is 55% of the excess if taken out as a lump sum or 25% if only a pension is taken.
The pension pot can be made up of Personal Pensions and the NHS Pension (As the NHSPS has no actual fund of invested money, the value of the fund is calculated at 20 times the pension entitlement plus the lump sum payable.)
Example
Dr Jones has the following pension funds
- A Personal Pension Scheme (PPS) with a value in its fund of £150,000
- NHSPS – Pension Entitlement £55,000
- Lump Sum £165,000
Calculation of Lifetime Allowance
- PPS 150,000
- NHSPS
- Pension 55,000 x 20 = £1,100,000
- Lump sum 55,000 x 3 = £165,000
- £1,415,000
The tax charge on the £385,000 excess above the new Lifetime Allowance would be:
- If a lump sum is taken £211,750 (55% tax rate)
- If only a pension is taken £96,250 (25% tax rate)
Please note Income Tax will also be payable at your highest marginal rate on income taken.
Individual and Fixed Protection
For those who think they are likely to be caught by the tax charge, transitional protection is available in the form of either Fixed Protection (2016) or Individual Protection (2016). Each protection has different implications and carries a risk of invalidation in particular circumstances. In many cases, it will be a straightforward decision to apply for protection, however, for those with mixed benefits, it will be complicated by the uncertainty of investment returns and the increase in Defined benefits through the NHS pension.
Benefit Crystallisation Events
There are various times when pension benefits are tested against the lifetime allowance, called Benefit Crystallisation Events
This will normally be when benefits are taken.
How does age 75 affect pensions
When an individual commences Pension Drawdown, there is a test against the lifetime allowance. If this is prior to age 75, there will be a second test at age 75 (or at the date they buy an annuity if earlier). Individuals already in drawdown, need to consider whether or not they apply for Protection, if their fund or any pension benefits elsewhere (including NHS Pension benefits) are likely to exceed the £1,030,000 limit at age 75.
Conclusion
It is vital to determine your current Lifetime Allowance situation and how that might impact on your Pension planning. It might be you:-
- Stay in the NHS scheme but don’t apply for protection
- As above, but increase the NHS cash lump sum you receive to the maximum available under HMRC rules
- Stay in the Scheme, apply for protection – consideration has to be given to any personal pension benefits
- Leave the scheme and apply for protection
Critical Information About Your NHS Pension
The Annual Allowance
- The Annual Allowance has been reduced from £255,000 in 2010/11 to its current limit of £40,000 (2018/19).
- The new legislation limits tax relief on pension contributions to £40,000. If more than £40,000 (Gross) is contributed or deemed to be contributed in the relevant tax year, the excess will be taxed at the individual’s marginal tax rate. However, carry forward of unused pension relief from the preceding three tax years, may help solve this.
How does this affect Members of the NHS Pension scheme?
The NHSPS is a Defined Benefit Scheme (i.e.), a pension scheme which promises certain benefits on retirement, based on an individual’s NHS earnings. The pension benefits increase each year with the members service, however this increase in service is now triggering a potential Tax Liability for certain members.
The formula to calculate this potential annual pension increase is complicated, especially for GP’s and Dentists, who accrue benefits within a dynamised pool of pension entitlement. To perform the calculation, it will require the member to:-
- Identify their pension entitlement as of 1 April
- Repeat the process as at 31 March the following year
- Apply the increment factor, obtain the correct Dynamising figures, add on the tax free element and apply the relevant calculation factor
- The difference between the two figures is the deemed increase in benefits for Annual Allowance purposes.
Example
Dr Jones has at 1 April a notional Pension Pool of £1,750,000
After applying the Dynamising and incremental factors, he has an opening figure of £479,930
However, Dr Jones has high pensionable earning during the tax year, so his notional Pension Pool stands at £2,000,000 on 31 March the following year.
Applying the dynamising and incremental factors, means his closing figure will be £532,000
Difference between opening and closing dynamising figures is £52,070.
Less Annual Allowance – £40,000
Excess Contribution Liable To Charge – £12,070
Tax payable if no reliefs available – £5,431.50 (45% of £12,070, assuming the individual is an additional rate tax payer)
Reliefs available are any unused Annual Allowance below £40,000 from the previous three years.
If you have, or are still making contributions to a Personal Pension, things become far more complicated, as these benefits have to be entered into the calculation. Pension input data can wildly effect the final tax liability and care has to be taken that these figures are correct
Conclusion
You are likely to be at risk if:
- You have a large dynamised notional pension pool.
- You have mixed benefits, i.e. NHS plus personal Pensions.
- Your pensionable earnings increase substantially.
- You move from part-time to full-time in the year.
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