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Changes to pension lifetime allowance explained

Phil Mileham explains how GPs can protect their pensions ahead of the reduction of the lifetime allowance to £1.5m from £1.8m in April.

Some GPs who are close to retirement may find that they would be better off by leaving the NHS Pension Scheme
Some GPs who are close to retirement may find that they would be better off by leaving the NHS Pension Scheme

From 6 April 2012, the amount GPs can save into pensions tax-efficiently over their lifetime reduces from £1.8m to £1.5m.

This is known as the lifetime allowance (LTA) and it includes any private pensions you have in addition to your NHS pension.

If you exceed the LTA, you will have to pay a tax charge on the excess. This will be 55% if you take the excess as a lump sum or 25% if you take it as income.

What protection is available?
If you think you might exceed the LTA, you may be able to apply for fixed protection to allow you to maintain the LTA at £1.8m.

Fixed protection will be unsuitable for many GPs because there are stringent restrictions, but if you are eligible it could provide considerable savings.

Who is eligible for fixed protection?
Fixed protection is only suitable for those GPs who have no plans to build up further NHS pension benefits after 6 April 2012 or make further contributions to any private pensions.

Case Study

Sally, a 56-year-old GP, is leaving her practice in February 2012 to pursue other interests and will also leave the NHSPS.

She intends to delay taking her benefits until her normal retirement age of 60. By then, it is estimated her NHS pension benefits will have a capital value of approximately £1.5m while the value of her personal pension will be roughly £500,000, giving her a total expected pot of £2m. She registers with HMRC for fixed protection by the 5 April deadline and secures an LTA of £1.8m rather than £1.5m. She makes no further pension contributions.

When she takes her NHS benefits on her 60th birthday, the value (£1.5m) of these benefits is under £1.8m, so she does not incur additional tax charges. When she takes additional benefits of £500,000 from her personal pension later, her total pot of £2m takes her over her LTA by £200,000. She decides to take these excess benefits as cash, incurring a tax charge of £110,000 (55% of the £200,000 excess). Because she registered for fixed protection her tax bill is reduced by £165,000, because she is only taxed on an excess of £200,000 rather than £500,000.

Is it worth opting out of the NHS Pension Scheme?
Some GPs who are close to retirement may find that they would be better off by leaving the NHS Pension Scheme (NHSPS) rather than staying put and facing the extra tax bill.

However, for the vast majority of GPs, this would be unwise because the benefits lost would be far greater than any advantage gained from a higher LTA.

This is a highly complicated area and you should seek guidance from a financial adviser who has a good understanding of the NHSPS.

Applying for fixed protection
To apply for fixed protection, GPs should complete the application form APSS227 which is available from HM Revenue & Customs (HMRC) website (www.hmrc.gov.uk).

Applications must be received by 5 April 2012.

  • Phil Mileham is national sales manager with Wesleyan Medical Sickness, www.wesleyan.co.uk

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