Understandably GPs are very concerned about the proposed rise in NHS pension contributions. They are worried too by possibly having to pay more tax as a result of the reduced annual allowance (AA) for contributions from 6 April 2011 and by the fall in the lifetime allowance (LTA) for pension benefits from 6 April 2012.
These two issues are making many GPs question whether remaining in the NHS Pension Scheme (NHSPS) is worthwhile. However, the guaranteed nature of NHSPS benefits remains attractive and will be difficult to replicate in any private arrangement.
Nevertheless, GPs will need to review their overall income and pension position to avoid encountering unexpectedly large tax charges on both current income and pension benefits.
Issues to consider
Increased NHSPS member contributions proposed by the Hutton Report on public sector pensions have been accepted by the government. These are for average rises of 3 per cent, but high-earning GPs could potentially pay up to 15.5 per cent.
With the reduction in the AA for tax-relievable contributions from £225,000 to £50,000, assuming there is no unused allowance to carry forward, contributions exceeding the AA will attract a tax charge at the GP's marginal rate. This is likely to be 40 per cent, but for very high earners, 50 per cent.
The LTA for pension benefits will fall from £1.8 million to £1.5 million on 6 April 2012. The potential tax charge on any excess will be 55 per cent if the excess is taken as a lump sum and 25 per cent if it is taken as pension. The extra pension will also be taxable.
Effect on income
Of immediate concern to GPs will be the reduction in income. This will depend on overall income, and whether there are 'deemed' pension contributions in excess of the AA.
Based on comments made by the BMA, the examples here look at the position for GPs earning £100,000 whose pension contributions go up from 7.5 to 13 per cent, and for GPs earning £150,000 and £180,000 a year whose contributions go up from 8.5 to 15.5 per cent.
I have assumed that earnings are net of expenses but before tax. These earning levels are not intended to reflect GPs' actual earnings.
The impact on a GP earning £100,000 is a reduction in pay after tax of over £3,000 (circa 6 per cent), assuming the GP does not have a 'deemed' pension contribution above the AA.
Although the GP may see an increase in their NHSPS contribution, this increased contribution will attract tax relief, which, in this case, could be 40 per cent.
However, if the GP is close to retirement with significant lifetime earnings, dynamisation (uprating of lifetime NHS pensionable earnings) could mean they do have 'deemed' pension contributions above the AA.
If the excess 'deemed' contribution was £10,000, the GP would have a tax charge of £4,000. This would see the GP's net income fall by over £7,000 (circa 13 per cent) taking into account their increased NHSPS contribution.
The overall percentage reduction for a GP earning £150,000 is very similar, as the increased pension contribution will have the effect of reducing the GP's overall income below £114,950 thereby enabling them to reclaim some of their personal allowance. This reduces where income is above £100,000 by £1 for every £2 above.
Assuming the GP has no 'deemed' contribution above the AA, the reduction in income is over £4,000 (circa 6 per cent). However, a 'deemed' £15,000 excess contribution could result in an additional tax charge of £6,000, reducing a GP's before tax pay by over £10,000 (over 13 per cent).
A GP earning £180,000, assuming there is no 'deemed' contribution above the AA, would be over £7,500 worse off (a reduction of over 8 per cent).
However, with a 'deemed' £18,000 excess contribution, the overall reduction in before tax pay would be over £14,500 (over 16 per cent).
Where the tax charge is above £2,000, it is proposed that GPs can elect for the NHSPS to pay some or all of it, although adjustments to cover the cost will be made to pension benefits on retirement.
Effect on pension benefits
GPs also need to carefully review their overall pension provision before 5 April 2012 as the reduction in the LTA to £1.5 million could lead to a significant tax charge.
This will be particularly true for GPs close to age 60 who will have benefits at retirement around or above the current £1.8 million cap.
If GPs in this position continue accruing benefits in the NHSPS after 5 April 2012, this could result in an LTA tax charge of 55 per cent on the £300,000 difference between the current and the reduced LTA. Or this would lead to an additional tax charge of up to £165,000 if the excess is taken as a lump sum.
GPs who will be liable to both an AA and an LTA tax charge will need to look carefully as to whether remaining in the NHSPS is still worthwhile.
If after reviewing all of the figures a GP decides to leave the scheme, they should apply for 'fixed protection' (FP) as this will enable them to retain the current £1.8 million LTA.
But if additional pension benefits (in excess of Consumer Prices Index revaluation) are accrued after 5 April 2012, FP will be invalidated and the reduced £1.5 million LTA will apply.
- Stephen Caps is a chartered financial planner at Ramsay Brown Financial Services, www.ramsaybrown.co.uk