As discussed in my article in December 2010, Keep abreast of pension changes, over the course of the next two tax years, both the annual allowance (AA) and lifetime allowance (LTA) pension tax relief limits will be reduced.
These reductions may result in additional tax liabilities for some high earning GPs and/or GPs with long NHS pensionable service.
The AA, which places a limit on ‘tax-advantaged’ pension contributions (on which GPs get tax relief) each year, will reduce from the current level of £255,000 to £50,000 on 6 April 2011.
Contributions up to £50,000 a year will attract income tax relief at an individual’s marginal rate of tax (up to 50%). However, contributions over £50,000 will be subject to tax at the individual’s marginal rate.
The £50,000 AA limit applies to all ‘deemed’ pension contributions each tax year, including NHS Pension Scheme (NHSPS) contributions.
Contributions into defined contribution (DC) schemes such as personal pension plans will be the actual amount invested.
For defined benefit (DB) schemes such as the NHSPS, the deemed 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 for GPs who started contributing before 1 April 2008, the amount of the additional lump sum is added to the deemed pension contribution.
You will be able to carry forward any unused AA from the previous three tax years.
The LTA, which sets a limit on the capital value of tax-advantaged pension benefits at retirement, will reduce from the current level of £1.8m to £1.5m on 6 April 2012.
For money purchase pension schemes (where the accumulated fund is used at retirement to buy an annuity which pays you an annual income) the LTA capital value is the fund value when benefits are taken.
For DB schemes (including the NHSPS) the LTA capital value is the pension payable multiplied by a factor of 20. Where a scheme pays a separate lump sum, (such as the NHSPS 1995 section), the amount of the lump sum is then added to this figure.
Benefits which exceed the LTA will be subject to a LTA penalty charge which is 55% where the excess is taken as a lump sum and 25% where taken as a pension.
NHSPS members who feel that they will exceed the new lower LTA (£1.5m) will be able to apply to HM Revenue & Customs (HMRC) before 6 April 2012 for ‘fixed protection’ (FP).
Under FP, the member’s LTA will be fixed at £1.8m rather than £1.5m.
However, FP will be lost if the member breaks one of the qualifying conditions after 6 April 2012.
The main restrictions are that contributions cannot be paid into a money purchase pension arrangement (either by the member or on their behalf) and the member cannot have ‘benefit accrual’ in a DB or cash balance pension scheme.
For the NHSPS, this means that benefits cannot increase by more than the Consumer Prices Index (CPI) each year after 6 April 2012. Contributions after that date would need to stop.
GPs who already have primary protection (PP) or enhanced protection (EP) will continue to benefit from those protections by reference to a LTA of £1.8m but they will not be allowed to apply for FP.
|Example 1: Annual Allowance (AA) charge (post 5 April 2011)|
(1) Assumes a 3% inflation rate and as the dynamisation (revaluation) of historic accrued NHS benefits is currently set at inflation plus 1.5% this gives a dynamisation figure of 4.5%. Allowance is also made for the estimated proportional amount of added years (AY) secured during the year (circa £452 gross pension and circa £1,356 lump sum).
(2) Inflation assumed to be 3% over the period.
(3) In this example, it is assumed that the member has no unused AA to carry forward from the previous 3 tax years.
|Example 2: Lifetime Allowance (LTA) charge (post 5th April 2012)|
(1) To keep the example straightforward, it is assumed that the accrued benefit values remain the same.
Stephen Caps is a chartered financial planner and director of Ramsay Brown Financial Services Limited, www.ramsaybrown.co.uk
Find out more on the NHS Business Services Authority website www.nhsbsa.nhs.uk