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Keep abreast of pension changes

Stephen Caps updates GPs on NHS pension swaps, tax relief and the public sector pensions review.

If you want to take your pension before age 55, this will not be possible under the 2008 section (Photograph: Istock)
If you want to take your pension before age 55, this will not be possible under the 2008 section (Photograph: Istock)

Over the next few years, many GPs will face important decisions relating to their pensions provision including the NHS pension scheme (NHSPS) benefits.

This is as a result of the NHSPS Pension Choices (PC), the recently announced pension tax relief restrictions and Lord Hutton's ongoing public sector pensions review (PSPR).

NHS Pension choice
There are now two different sections within the NHSPS. Members who joined the NHSPS prior to 1 April 2008 are in the '1995 section'.

Anyone joining for the first time on or after 1 April 2008 will be in the '2008 section'.

Everyone contributing under the 1995 section rules are however being given a one-off opportunity to transfer their existing and future membership to the 2008 section PC exercise.

Eligible members will be provided with a personalised PC pack outlining the main issues and explaining what action needs to be taken if they wish to transfer into the new scheme. The PC pack will also include estimates of the potential benefits that members could expect to receive at retirement from each scheme.

Distribution of the packs to GPs has begun on a phased basis and all GPs should receive a pack by the end of 2012.

For most GPs and, indeed, most other NHSPS members, the key factor that will determine whether or not they will be better or worse off in the 2008 section is the age at which they plan to retire.

This is because, although the 2008 section has a higher accrual rate of 1.87 per cent (the amount by which pension benefits accumulate each year), members in the 1995 section (accrual rate 1.4 per cent) can retire on or after 60 years without any reduction in pension benefits. Members of the 2008 section however would incur a penalty by taking benefits before age 65.

Calculations tend to show that members who were under the age of 60 on 1 October 2009 and plan to retire before age 63 are likely to be better off remaining in the 1995 section, while those who plan to retire after age 64 should benefit from moving to the 2008 section.

Depending on individual circumstances, other factors may also be important. For example, if you want to take your pension before age 55, this is not possible under the 2008 section.

If you are paying into a 1995 section added years contract, this is not available under the 2008 rules.

If you transfer to it, the contract will stop but you will get a credit in the new scheme for added years already bought.

However, if you plan to return to NHS work after retirement, the 2008 section may be better as unlike the 1995 rules, you will be able to build up more NHSPS benefits.

Members will also need to take into account the new pension tax relief restrictions.

In some cases it may be prudent to take NHSPS benefits earlier than originally planned, to mitigate any potential tax charges.

Tax relief restrictions
The annual allowance (AA), which places a limit on how much can be paid into tax advantaged pension schemes each year, will be reduced from its current level of £255,000 to £50,000, with effect from the start of the 2011/12 tax year on 6 April.

Pension contributions up to £50,000 a year will continue to receive income tax relief based on an individual's marginal rate of tax including the new 50 per cent rate.

However, contributions over this amount will be subject to a tax charge at the individual's marginal rate.

The £50,000 AA limit applies to all 'deemed' pension contributions paid in a tax year, and will include contributions to the NHSPS.

Contributions into 'defined contribution' schemes such as personal pension plans (PPPs) or self invested pension plans (SIPPs) will be the actual amount invested.

For 'defined benefit' schemes, such as the NHSPS, the deemed level of contribution will be based on the increase in the individual's pension benefits over the year, multiplied by a factor of 16.

Where a scheme pays a separate lump sum, such as the NHSPS 1995 section, the amount of the additional lump sum is added to the deemed pension contribution. There will be the facility to carry forward any unused AA from the previous three tax years.

While deemed AA contributions should be relatively straightforward to work out for employee members of the NHSPS, they will be more complicated for self-employed GPs whose actual contributions fluctuate a lot and are not known until some significant time after the tax year is over.

The NHSPS will have to provide this information to members whose benefits exceed the £50,000 limit.

The lifetime allowance (LTA) will also be significantly reduced and will go down from the current level of £1.8 million to £1.5 million from 6 April 2012.

Transitional protection will be available to individuals who have already accrued pension pots in excess of the £1.5 million LTA limit, or have arranged their affairs so that they will have exceeded the £1.5 million by 5 April 2012.

The final LTA protection rules have yet to be announced.

The Treasury has however suggested that individuals could be allowed to retain benefits in excess of the new £1.5 million and within the current £1.8 million limit, provided they do not contribute any further payments into a defined contribution scheme, such as a PPP or SIPP, and also do not accrue any further benefits within the NHSPS.

Public sector pensions review
Lord Hutton recently delivered his interim report on reforming public sector pensions, including the NHSPS, to ensure 'fairness, sustainability and transparency', while at the same time ensuring that the schemes continue to provide an appropriate level of benefits to its members.

The final report and recommendations are due in time for the chancellor's Budget in spring 2011. The interim report makes it clear that existing members'

accrued rights should be protected. However this does not extend to protecting future rights yet to be built up - nor indeed to existing terms, such as the retirement age for current members.

It concludes that the cost of providing benefits to public sector scheme members has risen significantly over the years, due to increasing longevity and falling inflation and interest rates, with this additional cost falling predominantly on employers and the tax payer.

Overall, the interim report suggests that there is a need for both short-term reform in order to more fairly spread the costs of the benefits between employees, employers and tax payers and that, in the longer term, more structural reform is required.

In the short term, it suggests that an increase in member contributions would be reasonable, while in the longer term, structural reforms such as moving from final salary-based schemes to career average revalued earnings (CARE) schemes. NHSPS benefits for GPs are already calculated on a CARE basis and therefore such a change should not affect GPs.

Other suggestions include an extension to the normal retirement age (NRA) for members perhaps to age 65 or later, where this is not already the case.

Seek advice
The issues outlined here are not exhaustive and further aspects relating to pension tax relief restrictions and public sector reforms are still to be finalised.

The various changes and the way in which they will interact with one another will have an affect on many GPs. Those affected should keep abreast of the changes and seek guidance from their financial adviser as to what actions (if any) they should take.

Key Points

NHS Pension Choice Exercise

  • 1995 section normal retrement age (NRA) is 60.
  • 2008 section NRA is 65
  • Early retirement from 1995 section from age 50, subject to early retirement factors (ERFs) which reduce benefits.
  • Early retirement from 2008 section from age 55, subject to ERFs.
  • Added years contracts cannot be continued in 2008 section.
  • Members will be provided with a personalised PC pack.
  • Transfer to 2008 section is irreversible.

Tax Relief Restrictions

  • Annual Allowance (AA) reduced to £50,000 from 6 April 2011.
  • Factor of 16 used to value 'deemed' AA value of NHSPS contributions.
  • Excess AA contributions subject to tax at highest marginal rate.
  • Carry forward of unused AA from previous three years.
  • Lifetime allowance (LTA) to be reduced to £1.5 million from 6 April 2012.
  • Transitional LTA protection to be offered.

Public Sector Pensions Review interim report

  • An increase in member contributions.
  • Move from final salary to career average revalued earnings schemes.
  • Defined benefits basis should be maintained.
  • An increase in normal retirement age.
  • Accrued rights of existing members should be protected.
  • Stephen Caps is a chartered financial planner and director of Ramsay Brown Financial Services Limited, www.ramsaybrown.co.uk

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