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Pension planning

Pension planning

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As a GP, the pension changes that took place on 6 April 2011 could have a major impact on your pension planning - affecting both private and NHS pensions.
As a GP you are more likely to be affected than many other professional groups and as a GP any significant increase in your pension contributions could place you at even greater risk.

In certain circumstances, reviewing your pension could help you avoid a tax     charge of up to 50%.

Are you confident you know at what age you can retire without a penalty?

What is  ‘Pension Accrual’ and will you have to pay more tax?

Will you be affected by the Lifetime Allowance?

What happens when the current NHS pension scheme closes in April 2015
There have been two significant changes over the past two years which will affect  GP’s, The Hutton Report and the HMRC pension threshold changes.

Firstly let’s look at the changes Lord Hutton is recommending to the NHS Pensions scheme and then analyse the recent HMRC changes and see how they affect GPs.

There are three main proposals in the changes to the NHS Pension scheme: the closure of the existing NHS Pension scheme; a change to retirement ages; and an increases in contributions.

The existing NHS pension scheme will close on 1st April 2015, all members will be moved to a new scheme where benefits will be calculated on career average benefits...’CARE’.

This new scheme will have a retirement age linked to state pension age. Members 50 and over on 1 April 2012 will be able to remain in the existing 1995 scheme and will retain their pension scheme retirement age of 60.

Members, between the ages of 46 years and six months and 49 years and 11 months, will fall into ‘tapered relief’. Tapered relief allows members to phase into the new scheme over a period of up to 10 years, thus allowing them to preserve their existing benefit package for longer.

The government stated they want to save £3.2 billion across public sector pension schemes over the next three years, this equates to a contribution increase of roughly 3% of pensionable pay. They also stated that due to the fact there’s a wide income range in the NHS, they aren’t going to uniformly apply this 3% increase. They have indicated they want to protect the lower earners by not increasing contributions for members with incomes under £26,550pa. In order to achieve this, the higher earners (doctors and dentists) are going to have to bare the brunt. Contributions will be increased to either 9.9% or 10.9%pa, depending on income for the years 2012/13, With further increases due to take place from 2014/15.

They have confirmed the following:
- Past accrued service to be protected
- No forced move of accrued benefits into the new scheme
- Benefits to be uplifted by “inflation” – probably consumer price index
The positive (if there is one) is existing benefits will be protected, even though they originally wanted:-
- To increase the normal pension age from 60 to 65 in a single move
- Drag all accrued benefits into the “new” scheme
- No choice to stay in the “old” scheme

If these changes aren’t bad enough, let’s look at the HMRC changes to limits on tax relief. Two recent changes to pension allowances may require a new annual return.

The annual allowance is the amount you can contribute into a pension scheme. It places a limit on the amount of pension growth available with tax relief. This limit was reduced from £255,000 to £50,000pa on the 6 April 2011 and incorporates both personal pensions and more importantly, NHS main scheme benefits.

How would this affect an NHS pension scheme (NHSPS) member?
While the NHSPS is a defined benefit scheme (i.e.) a pension scheme which guarantees certain benefits at retirement. The pension benefits increase each year with the members’ service. This increase in service is now triggering a potential tax liability for certain members.

The formula to calculate this potential annual pension increase is complicated, especially for GP’s and dentists, who accrue benefits within a dynamised pool ofpension entitlement. To perform the calculation, it will require the member to:-
- Identify the pension entitlement of the member as of 1 April
- Repeat the process as at 31 March the following year  
- Apply the increment factor, obtain the correct dynamising figures, apply the multiplication factor
- Add on the tax free cash element etc.

If the difference between these two figures exceeds £50K, then the excess is potentially taxable at your highest marginal rate.

The example below shows how this works in practice:
Dr Jones has at 1 April a notional Pension Pool of  £1,750,000

After applying the Dynamising and incremental factors, he has and opening figure of £479,930

However, Dr Jones has high pensionable earning during the tax year, so his notional Pension  Pool stands at £2,000,000 on 31 March the following year.

Applying the dynamising and incremental factors his closing figure will be    £532,000
Difference £52,070
Less Annual Allowances £50,000
Tax Charge £2,070
Tax payable if no reliefs available 2,070 @ (probably) 50% £1,035
(Reliefs available are any unused Annual Allowance below £50,000 from the previous three years.)

In order to make this calculation, you need to obtain an annual NHS pension statement from the NHS Pensions agency......they currently do not offer them, but they say, they may have them by the 2013/14 tax year.

If you have or are still making contributions to a personal pension, things become far more complicated, as these benefits also have to be entered into the calculation. Pension input data - the dates insurance companies use for their start of a pension year - differ) can wildly effect the final tax liability and care has to be taken that these figures are correct.

Large increases in pensionable income can also trigger a tax liability, such as:
1.    Moving from part time to full time
2.     Moving from hospital service to general practice
3.     Moving from one practice to a high earning practice

Conclusion
You are likely to be at risk if:
You have a large dynamised notional pension pool.
You have mixed benefits, i.e. NHS plus personal pensions.
Your pensionable earnings increase substantially.
You move from part-time to full-time in the year.
You are taking Tier 2 ill health retirement.
If you are buying additional pension by lump sum of in excess owf £2,500.
It is a members responsibility to ensure that any annual allowance tax charges are worked out, declared and paid in time. For 2011/12 the self-assessment deadline for declaring and paying any tax due is 31 January 2013.

Pension Lifetime Allowance
The Lifetime allowance is the maximum value of pension/lump sum that an individual can take from their pension arrangement without incurring a tax charge.

The NHS use the following formula to measure scheme benefits for all of the scheme members

The NHS Pension x 20 plus the tax free lump sum plus any other pension plan including additional voluntary contributions (AVCs) and free-standing additional voluntary contribution (FSAVCs).

If this figure breaches the new limit, a tax charge will be applied to the lump sum and the annual retirement pension.

The lifetime allowance was £1.8M, but has reduced to £1.5M with effect from 6 April 2012.

Up until 6 April this year, you could have taken steps to attempt to protect the higher limit by either electing several types of protection, the most recent was known as fixed protection. If you have fixed protection, this still may not protect the £1.8m limit, as the member needs to have their pension benefits tested annually to ensure there isn’t a breach of normal accrual.

 Indeed, if your income in any one month breaches normal accrual (broadly equivalent to the CPI limit) you will revert to the standard lifetime limit of £1.5m. This could happen to virtually all GP’s just with their global sum payment.
If all your pension funds taken together have a value in excess of 1.5 million in 2012/13 and are paid out (a benefit crystallisation event) you will be taxed on the excess above £1.5m.

The tax payable is 55% of the excess if taken out as a lump sum or 25% if only a pension is taken.

Example
Dr Jones has the following pension funds

A personal pension scheme (PPS) with a value in its fund of     £250,000

A self invested pension fund (SIPP) which holds the surgery premises valued at                 £300,000
NHSPS  -  annual pension     £55,000
Lump sum     £165,000

Calculation of Lifetime Allowance
PPS    250,000
SIPP    300,000
NHSPS
Pension 55,000 x 20    1,100,000
Lump sum 55,000 x 3       165,000                1,815,000

The tax charge on the £315,000 excess above the new Lifetime Allowances would be
If a lump sum is taken    £173,250                55% tax rate
If only a pension is taken      £78,750                25% tax rate

Most GPs will probably be horrified to learn that all of the above applies now, in fact it applied from the 2011/2012 tax year....last year!

There are several specialist accounting firms offering to make annual calculations for you as an individual or as a group practice.

It might also be useful requesting a pension forecast. This can be obtained from the NHS Business Services Authority Pensions Division. You will either need your NI number to locate you. When you request this, also ask for a statement of service. This will show if they have all of the jobs you have done prior to moving to general practice registered...better to solve any issues now, rather than trying to do at the point of retiring.

Conclusion
The ever-changing tax and pension legislation means it is all too easy to breach a duty quite innocently and with no dishonest intent or motive;
It’s also very apparent that a large proportion of GP’s are blissfully unaware of these changes. It’s probably also likely that a non medical specialist accountant will also not be fully up to speed.

Please also note, the chancellors Autumn statement has made a recommendation to reduce the lifetime pension allowance from £1.5m to £1.25m. This will have significant pension planning implications for virtually all full time medics.
A follow up to this article will appear covering this in full, once these proposals have been agreed and implemented.

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