Virginia Burke, Business Development Director at MyCSP, explains why orthopaedic surgeons, rheumatologists and senior NHS staff are being advised to review their pension provision due to HMRC changes.
From 6 April 2014, the Lifetime Allowance (LTA) – the maximum amount of pension savings that an individual can amass and still qualify for tax relief over their lifetime – will reduce from £1.5m to £1.25m. Individuals who accumulate pension pots over £1.25 million may face a tax charge of 55% on any excess.
The Annual Allowance (AA), which is the maximum annual contribution allowed into a pension scheme that qualifies for tax relief will also reduce from £50,000 to £40,000 in any one year.
While these figures appear substantial, in reality many practitioners working in the orthopaedic sector could be affected. Senior NHS workers earning over £100,000 a year may breach the new annual allowance when it reduces in April. But the changes don’t just affect the highest earners, such as consultants or orthopaedic surgeons; even nurses or other NHS staff earning over £45,000 a year could breach the annual allowance if they have over 20 years’ service and receive a significant promotion.
In reality, most people now work for several employers in their working careers, both public sector and private, and may therefore have both what are known as Defined Contribution (DC) and Defined Benefit (DB) schemes. DC schemes are ones where the employee and often the employer put in a specified amount, which is invested, allowing the member to buy a pension when they retire.
If you have worked for a number of employers it’s the sum of all the pension pots accumulated that counts. However, the calculation is less obvious for Defined Benefit scheme members as most won’t appreciate the notional pot of money that sits behind their final salary pension, which HMRC calculates to be 16 times the pension for annual allowance purposes and 20 times the annual pension for lifetime allowance purposes.
The same issue applies to the reduction in the Annual Allowance to £40,000. Most people will be aware if they are likely to be contributing such a large amount in a single year, but it’s easy to get it wrong, especially if you work for two or more employers, or your work has a performance basis which also qualifies for pension benefits.
These issues are complex and we would advise contacting your employer or pension scheme if you think you may be affected. MyCSP offers a service to employers wishing to provide support to affected members. It is important that scheme members are aware of the upcoming changes in order to make informed choices about their options and ensure the correct HMRC reporting procedures are followed.