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Mitigating the impact of pension tax changes

What options are available to GPs affected by the changes to pensions annual allowance and lifetime allowance, which come into effect in 2016? Bhargaw Buddhdev explains.

Changes to pension taxation come into effect in 2016 (Image: iStock)
Changes to pension taxation come into effect in 2016 (Image: iStock)

Major changes to pension taxation to come into effect from 6 April 2016 and many GPs could be affected by the changes to the annual allowance (AA) and lifetime allowance (LTA) without realising.

The chancellor'ss summer Budget of 2015 included a number of announcements about the taxation of pension savings.  

From the 2016/17 tax-year, the current AA of £40,000 will be tapered for anyone whose total income (including the value of pension savings and investment income) is above £150,000. If total income is over  £210,000, the AA will be cut to £10,000. Individuals with income (excluding pension savings) below £110,000  should not be affected.

These reductions in the AA for higher earners come on top of the previously announced reduction of the LTA from £1.25m to £1.0m from 2016/17. The LTA stood at £1.8m for 2011/12, before successive reductions to £1.5m, then to £1.25m and now to £1.0m from 2016/17.

Tax consequences of reduced pension allowances

The reduced AA and LTA could have major tax consequences for pension savings, both while accruing benefits and when drawing benefits at retirement. For example, from 6 April 2016 any increase in accrued pension in excess of £625 p.a. (after CPI inflation) will incur an AA charge for individuals with total income, including pension savings, of over £210,000.  

The AA charge will be at the individual’s marginal rate of tax, i.e. 45% for this level of earnings. Substantial tax charges will also be levied when benefits are drawn at retirement where the pension benefits exceed the LTA.

Mitigating the impact

There are various ways to mitigate the full effect of the reduction in lifetime allowance, although there are potential drawbacks. Individuals should consider whether any of the expected new LTA protections – Fixed Protection 2016 or Individual Protection 2016 - would be suitable for them.  

Individual Protection 2016 would be an attractive solution for individuals in the NHS scheme as they, like most public sector workers, are unlikely to receive any alternative remuneration from their employer if they opt-out of their pension scheme.

They would however need pension savings of at least £1m as at 5 April 2016 to qualify for Individual Protection 2016 (or pension savings of at least £1.25m as at 5 April 2014 to qualify for Individual protection 2014).  

The big question for many members in the NHS pension scheme who will face steep AA tax charges every year and an LTA tax charge when they draw their benefits is whether or not they should even continue with in the NHS scheme.

Anyone who thinks they may be impacted must take advice and should also consider the effect on other benefits, such as ill health and death in service benefits, if they were to opt out of the NHS pension scheme.

It is important that a detailed cost/benefit analysis is undertaken and for some it may still be beneficial to remain in the NHS scheme and for others the cost of staying in the NHS scheme may be substantially more than the cost of leaving.

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