You’ve no doubt heard that the pensions Annual Allowance (AA) and Lifetime Allowance (LTA) limits are due to reduce in April 2014, in turn causing a headache or two for some NHS Pension Scheme members as well as those who have accrued pension funds elsewhere.
Firstly, it’s worth pointing out that you are able to save as much as you like towards pensions each year, however you only currently receive tax relief on the first £50,000.
From 6 April 2014 this reduces to £40,000. Any excess amount may suffer a tax charge.
The first point to make is that the annual allowance calculation does not involve the amount of contributions paid by either the member or the practice / employer.
It relates to the accrual over the year (pension input period, which for the NHS is 1 April – 31 March) in excess of Consumer Prices Index.
Let’s look at Michael, a Dental Practitioner with a pensionable income of £120,000 in 2013/14, £2.5m of career dynamised earnings (CDE) and a member of the 1995 section of the NHS Pension Scheme:
The accrual for Annual Allowance purposes is:
Pension £38,150 – £35,770 = £2,380 pa
Lump sum £114,450 – £107,310 = £7,140
The pension accrual is multiplied by a factor of 16, and added to the lump sum, to give an Annual Allowance assessment of £45,220.
As we can see, Michael is within this year’s allowance, however if the figures were replicated in 2014/15 he will exceed the new reduced allowance.
As you are now able to request an AA Pensions Savings Statement from the NHS which will inform you whether or not you have exceeded the AA in any of the previous tax years, we have not set out the full calculation above as it is quite complicated.
Frankly, it’s not necessary to know how it is calculated as the NHS now provides the already calculated figures.
Note that for salaried staff or those who contribute to the Officer Scheme, the calculations are based upon service and not Dynamised Earnings.
Whether you’re a practitioner or an officer, if you’ve not received yours yet (the reason why you may have not received one is that your situation, as far as the NHS Pension is concerned, is deemed to be OK) the easiest way to request it is to call NHS Pensions on 01253 774774 (option 3) and ask for the 11/12 as well as the 12/13 statements (they may take up to 12 weeks to be processed).
You can then request them every October when they become available.
If you are currently contributing to other pensions, such as a personal pension, then it will be wise to request these statements as you will need to add the amount you contribute to the personal pension in each pension input period.
If you have exceeded the £50,000 in this or previous years then it’s possible to utilise ‘carry forward’, where you can use any unused allowance in any of the previous 3 years.
The key is that you can find out exactly where you stand so our advice is to request the figures so you can plan accordingly.
Paying The AA Tax
If a member is subject to an Annual Allowance charge they may be able to elect for the NHS Pension Scheme to pay some or all of the charge on their behalf (the alternative is to pay the tax as a lump sum via Self Assessment).
NHS Pensions will only pay the Annual Allowance charge from the NHS ension Scheme if it receives a scheme pays election notice on time and if mandatory requirements prescribed by HMRC are met, which are that the member’s:
a) Growth in NHS benefits exceeds the Annual Allowance; and
b) Their Annual Allowance charge liability for the relevant tax year, as a result of (a), has exceeded £2,000
In practice, the individual’s initial tax charge is not converted to a pension deduction until the member actually retires. Instead, the initial tax charge is increased in April each year between age 55 and retirement with interest based on CPI inflation plus 3% a year.
The tax charge itself has a factor applied to it (which depends on various factors), to determine the amount of the pension reduction.
For example, for a 55 years old female, the factor is 20 (ie tax charge / 20) and 3 x this amount for the lump sum reduction.
If you have an annual allowance tax charge from 2011-12, you have until 31st December 2013 to get your election to the NHS Pension scheme for the scheme to pay the charge.
Even if you are undecided whether you intend to use the scheme pays facility, which is available if you have a tax charge in excess of £2,000, it may be worth completing the form just to give yourself time to decide the best course of action.
It’s possible to reduce the amount paid by the scheme to as little as £1, but if you have not got your scheme pays election in by the end of this calendar year, you must pay the tax yourself.
Importantly, should you die before retirement no reduction would be applied to any dependants benefits which then become payable.
For the LTA, the limit is £1.5m, reducing to £1.25m on 6 April 2014.
So, for example, a dentist or doctor with no pension provision apart from the NHS Pension will exceed the limit if his or her NHS Pension is projected to be more than £54,347 per annum (from 6 April 2014) at the time they draw the pension (£1.25m / 23).
Of course, it’s possible that the allowance may increase at some point in the future by the time you draw the NHS Pension, however seeing as it’s been reduced twice in recent years (from a high of £1.8m) it may be best not to rely on this.
If the limit is exceeded at the time of taking the pension, a tax charge would be payable. For example, a dentist with an NHS pension of £65,217 pa would use up the whole current allowance of £1.5m.
After 6 April 2014, they would be c£250,000 in excess of the new allowance and would suffer a tax charge of £62,500 (if they elected to pay the tax charge via a reduction to their NHS Pension).
This would result in a reduction to the pension received of £3,125 pa (£62,500 / 20).
Note, these figures relate top the 1995 section of the NHS Pension Scheme, not the 2008 section.
Protecting Your Pension
It may be possible to retain the £1.5m limit and there are 2 forms of protection available from HMRC, Fixed Protection 2014 (FP14) and Individual Protection 2014 (IP14).
With the former, the member is not able to contribute to pensions in the future, so serious consideration must be given before such a big decision is made in terms of whether to cease being an active member of the NHS Pension, or your own personal pension scheme (note that all FP14 applications must be received by HMRC prior to 6 April 2014).
IP14 is available for those who will have an accrued pension pot in excess of £1.25m as at 6 April 2014. It allows the individual to ‘lock in’ an LTA of £1.25m – £1.5m (thus meaning that they will effectively have their own allowance) and crucially, continue to fund their pensions.
IP14 will be open to applications from 6 April 2014.
Full details are available on HMRC’s website.
As always when dealing with pensions and tax, it’s impossible to predict future legislation or to know what the AA or LTA will be over the next few decades.
In addition, future earnings and dynamising factors are as yet unknown. You also have to factor in the changes to the NHS Pension Scheme in 2015 with one of the changes being that the new normal retirement date will be brought in line with the state pension age (67 / 68).
What we do know is the legislation that applies today and it therefore makes sense to find out whether or not you will be affected and if any action is required on your part.
For the AA, call NHS Pensions on 01253 774774 (option 3) and ask for the 11/12 as well as the 12/13 statements (they may take up to 12 weeks to be processed).
Then discuss this with your professional advisers if you need further clarification.
For the LTA, calculate where you stand now. Then decide your best course of action, again with your professional advisers, as there are additional options available to you that have not been covered in this article (such as taking the NHS Pension early to minimise any tax charges).
The information detailed above is for information purposes only and must not be viewed as advice or recommendations as other criteria will be required for evaluation of individual needs.