Lifetime Allowance: do you know where you stand?
Money Matters – A new regular column to help your financial planning
Every senior doctor will be affected by the latest cut to the lifetime allowance (LTA) – the total amount you can put into your pension free-of-tax. The limit has been reduced three times in four years and in April 2016, will fall to just £1 million for the 2016–17 tax year. Those breaching the savings threshold face a 55 per cent tax charge.
As a very rough guide, individuals whose pensions are worth £50,000 a year or more will easily reach the £1 million ceiling, before taking into account any benefits from private pensions.
Previously when the government has reduced the LTA, it has offered protection schemes such as Fixed Protection 2012 and 2014 as well as Individual Protection 2014 but HMRC has not yet released details of new options.
While we await further news, it is extremely useful to obtain the necessary valuations of your pension now in order to make the best possible judgement of your position before April 2016.
You will need a good record of your NHS membership for the last three tax years and all of your pay slips in order to be prepared. Accessing accurate information including pension valuations has become harder with the introduction of the online ‘total reward statements’. Accessing a human at the NHS Pension Agency willing to help you with problems is being restricted and turnaround times for information significantly stretched. Unless your request for information is being processed now it is unlikely that you will get a response before the New Year.
Next year, senior doctors with incomes above £150,000 will see the size of their annual allowance – the amount they can pay annually into their pension and still qualify for tax relief – cut from £40,000 down to a possible £10,000.
For members of the 1995 section with a protected retirement age of 60 the option of ‘retire and return’ still exists. Taking 24 hours off and working part-time for the first month after ‘retirement’ before returning to a full-time clinical contract can be a good way to secure benefits (including lump sum) and protect against LTA charges. This route, which is not appropriate for all, is also under the spotlight, so delaying action may be to your disadvantage.
Anyone considering ‘opting out’ of the scheme should beware of scaremongering. It frequently transpires that staying in, even after tax charges, leaves you better off. The NHS pension remains a valuable benefit with long-term inflation protection and generous survivor benefits. It just takes a little time, effort and experience to work out what will be best for you.
Simon Bruce is managing director of Cavendish Medical – specialist financial planners for senior medical professionals in the NHS or private practice. For a second opinion on your finances, please call 020 7636 7006.