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Understanding recent tax changes and new pension allowances

This week, I have spent hours talking through the problems associated with superannuation. There is a great deal of worry about 'interference' with GPs' pension scheme, and a great deal of confusion about the recent tax changes for both the lifetime allowance and the annual allowance.

The 'interference' is not difficult to undertand, and just last week we saw an increase in the contribution rates. Click here for more details.

This means a GP earning more than £110,000 buying maximum added years will be paying 33.9% of their superannuable income in superannuation. Tax deductible, but likely to make the eyes water!

The tax changes are much more difficult to follow, but the consequences of getting it wrong can result in huge tax bills.

If a GP ends up with more than £1.5m in their pension at retirement, they will have to pay 55% tax on the excess. Details of the lifetime allowance can be found here.

If the GP exceeds the annual allowance, the excess over the new reduced limit of £50,000 is added to the GP's income for that year. So it is critical that GPs keep their annual contribution within the limit. More information about the annual allowance can be found here.

The GPs I met last week followed my advice and wrote to the Pensions Agency to know where they stand with these new allowances. Unfortunately, due to pressure of work the Pensions Agency are unable to reply, although they have indicated they will answer letters after the latest bill receives royal assent.

Luckily, some information is shown in their Pension Choices booklet. Helpfully, the booklet mentions the projected pension, and since the lifetime allowance is calculated at 23 x the projected pension, it is possible to make a decent guess.

The annual allowance is more difficult to estimate. We have produced various models that show that the problems commence once a GP has consistent superannuable earnings around £125,000, but at the moment a lot of important decisions are being made on 'best guesses'.

No wonder so many GPs are looking at 24-hour retirement.

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