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Should I temporarily opt out of the NHS pension scheme to avoid tax charges?

Kevin Quinn answers a question from a GP who may exceed the annual and lifetime allowance for tax relief on pension contributions.

Q. As a high earning GP I am concerned about going over the annual allowance and eventually the lifetime allowance for tax relief on pension contributions. I have been told that I can opt out and opt in of the scheme to limit my annual contributions and stay below the threshold. Is this the case?

A. Membership of the NHS pension scheme (NHSPS) is not compulsory and should they wish to do so, members can elect to ‘opt out’ of the NHSPS and then elect to ‘opt back in’ at a later date (although depending on the time period that elapses between ‘opting out’ and ‘back in’, they may have to re-join a new section of the NHSPS).

However, it cannot be guaranteed in advance that even where a member ‘opts-out’ of the NHSPS (and defers taking their benefits) they will not still end up exceeding the prevailing lifetime allowance (LTA) when benefits are taken. This is due to the fact that even in ‘deferment’, NHSPS benefits are increased each year in line with inflation as measured by the Consumer Prices Index (CPI).

Where annual allowance (AA) charges arise, members can either opt to pay the AA charge personally or they can use the ‘scheme pays’ facility to ask the NHSPS to pay the AA charge on their behalf (in which case their pension and lump sum benefits at retirement will be reduced) and if any LTA charge arises, then this will be automatically paid by the NHSPS and the members pension will be reduced accordingly.

For GPs, despite potential AA charges and/or LTA charges payable, if they continue contributing to the NHSPS, the benefits they receive at retirement will be higher than would have been the case had they ‘opted out’ earlier.

Consequently for GPs who still require more retirement income, the most important consideration is perhaps not ‘how to avoid paying extra tax’ but whether, even allowing for extra potential AA charges and/or an LTA charge, the NHSPS still seems likely to provide ‘good value’ as a means of boosting retirement provision.  

The NHSPS provides inflation-linked benefits which would be costly to provide in alternative arrangements such as, for example, personal pension plans and self-invested pension plans (SIPPs) where the benefits are not guaranteed in advance. Therefore members who are thinking about ‘opting-out’ to reduce AA and LTA tax charges should seek professional advice from a financial adviser regarding their personal situation before doing so.

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