Following on from Steve Cosford’s initial article, here is the second part of his post on the changes to the NHS GP pension scheme and how they might affect you. Steve has worked at Grant Thornton for 25 years and leads a healthcare team specialising in general medical practitioner clients. ?
Part 2: Life Time Allowance
Last week we talked about the annual allowance, so this post concentrates on the changes to the life time allowance or LTA.
At the point that you start to draw your pension then the value of your pension fund is tested against the current LTA, or if you have some form of protection in place the LTA applicable to that protection.
As a member of the NHS pension scheme there is not an actual fund that is attributable to you that is valued for the LTA test. Some of you may have had pension forecasts that refer to a value in excess of £3 or £4m which has caused some initial concern with some of my clients. However this particular value usually relates to the accumulated dynamised NHS profits that is used to calculate the starting annual pension that you will receive when you retire. For GP practitioners the LTA test amount is arrived at by applying a calculation to the annual pension that you will receive in retirement. The calculation is different depending on what section of the NHS pension scheme that you belong to. On a normal basis this is calculated as follows:
- 1995 section annual pension * 20 + lump sum (i.e. * 23, with the automatic lump sum being 3 * the normal pension amount)
- 2008 section annual pension * 20
There are some factors that can affect the calculation such as if you have added years, or if you switched from the 1995 section to the 2008 one, but as an initial guide, this will give a good indication of whether you are likely to be close to the LTA limit or not. In addition to this you would have to add on the value of any private pensions or any pensions in payment
In order to get an idea of what your pension is likely to be then you will need to apply to the Pensions Agency for a pension forecast. This will give you an indication of what your expected pension will be in retirement based on accumulated NHS profits to date, plus an idea of how much this is likely to increase for each additional year that you work leading up to retirement. You may need some help from an IFA in interpreting the information and looking at how it applies to you. We have advised a number of our clients to obtain a pension forecast each year, especially those who are in their 50’s and are starting to look at their retirement options.
For illustration purposes, if you are in the 1995 section then if you will have a pension at retirement age of £65,217 or less then you will not be above the current LTA (£65,217 * 23 = £1,500,000).
BUT, from April 2014 if your pension will be more than £54,348 ( £54,348 * 23 = £1,250,000) then you will be above the new LTA which means that you will have a life time allowance charge when you retire.
The life time allowance charge is calculated in one of two ways :
- A lump sum payment of 55% of the excess (e.g. if your LTA test amount is £1.4m, then the excess is £150k – £150k * 55% = £82,500 tax charge; or
- An annual tax deduction from your pension based on 25% of the excess calculated on a 20 year period. Using the same example then the annual tax deduction would be £150k * 25% / 20 = £,1,875 deduction each year.
For some the annual tax charge is not excessive and so it is not always the end of the world if you breach it. However there are potentially a number of ways to avoid or reduce the LTA tax charge such as :
- Fixed protection you can elect to take this before 5 April 2014 in order to still be tested against the £1.5m LTA. However post 5 April in order to retain the £1.5m LTA then you are likely to have to become a deferred member of the pension scheme which means that you no longer pay pension contributions and no further years NHS profits are added to the accumulated dynamised earnings calculation. In order to consider this you would need to already have accumulated a certain level of pension benefits for when you retire.
- Individual / Personal protection – This will potentially allow people with pension funds of greater than £1.25m on 05 April 2014 to apply for a LTA of between £1.25m and £1.5m and still maintain the value of their personal allowance even if they remain an active member of the NHS scheme and / or make contributions to a private pension. This protection could be useful for members of the NHS pension scheme who want to benefit from a higher LTA while remaining in the scheme. It is possible to apply for both personal and fixed protection.
- Retire from the NHS pension scheme and return to work (24 hour retirement), however you need to have already reached the relevant section’s minimum retirement age (50 for the 1995 section and 55 for the 2008 one). In addition to this a % abatement is then applied to your pension benefits already accrued which increase the further away you are from the normal retirement age of the relevant section (60 – 1995, 65 – 2008).
- Continue to be a contributing member, but at the point of retirement take an increased lump sum amount with the resulting reduction in your annual pension.
For all of the above there are potential benefits and consequences and there are a number of factors to consider in order to establish whether any of them are right for you or whether there are any additional options to consider. Grant Thornton’s IFA team led by Colin Gibson has provided information and advice to a number of our GP clients regarding this to enable them to decide if they need to take any action before the 5 April 2014 and what that action should be.
As you can see, this is a very complicated matter and you should seek professional advice from an appropriately qualified IFA with a good understanding of the NHS Pension Scheme and general pensions legislation before take any action.