Money Matters’ Simon Bruce of Cavendish Medical on why you must check your pension savings.
The annual allowance – the amount you can pay into your pension and still qualify for tax relief – has been cut to just £40,000, quite a drop from when it stood at £255,000 in 2011. For high-achieving doctors this allowance has been cut further to a possible £10,000, depending on income.
The new ‘tapered’ annual allowance reduces the savings limit by £1 for every £2 of income for individuals with ‘adjusted income’ of over £150,000, with a maximum reduction down to £10,000 for those earning £210,000 or more. Adjusted income includes not only NHS compensation but dividends, benefits in kind and pension contributions which adds to the complexity of the earnings calculation for the busy consultant with several income streams.
You may receive a pension valuation statement from the NHS Pensions Agency detailing your annual input. However, the figures can come as a big surprise to many because HMRC calculations for annual pension contributions are based on the deemed growth of your NHS pension in the year and not the actual pounds and pence you have paid into your pot.
A further complication is that many of the letters our clients receive are wrong – mainly down to the Pensions Agency allocating a back-dated award to the wrong tax year – so it can be imperative to get the calculations checked carefully to avoid generating an unnecessary tax bill. The letters are also received long after the relevant tax year has closed, so if you do not get on with it now there is little that can be done retrospectively to avoid a liability.
Any resultant tax charge has to be paid via self-assessment by amending the previously filed tax return or choosing to have your pension scheme pay the penalty (in return for reduced eventual benefits).
The very nature of doctors’ fixed pension arrangements mean it is all too easy to fall foul of the revised limit. Small increases in pensionable pay can result in hefty tax charges – be mindful of statutory pay rises, contractual increments or clinical excellence awards.
Planning ahead in terms of managing contributions to your private pensions as well as your NHS pot is crucial to avoid future mistakes. Don’t delay in establishing the best option for your particular situation.
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 contact us on 020 7636 7006.
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.