Graham MacLeod, financial planner at Tilney, has written for the latest edition of our membership magazine “voice”. Graham’s article is below and
College Members can read the full magazine through our website.
In 2006 the government launched “pension simplification” which aimed to reduce complexity and encourage the public to save for their retirement. The new pension rules included an Annual Allowance (AA) limit of £215,000 and a Lifetime Allowance (LTA) that was initially set at £1.5m and quickly increased to £1.8m. A decade later the Lifetime Allowance had been cut to £1m and the government announced their intention to cut pensions tax relief for high earners by introducing a Tapered Annual Allowance (TAA) for those with adjusted incomes of over £150,000.
At this level of income the standard £40,000 AA is tapered by £1 for every £2 of income above this threshold. The maximum reduction in the AA will be £30,000 and leave those individuals with an AA of £10,000 for the tax year (excess taxed at your highest marginal rate).
The LTA has since increased to £1.055 million, and will continue to rise in line with inflation at the beginning of every tax year. This means you could face a significant tax bill in the future if your pension is valued above £1.055 million when you retire, if no LTA protection in place. For most people, any excess will be taxed at 55%.
In 2017 the Financial Times wrote “Horrific, nightmarish, nasty and pernicious.” and not much has changed. However, despite continued criticism, tax relief on pension contributions remains one of the most expensive reliefs costing the Exchequer £50 billion per annum according to Government Actuary’s Department. They also estimate the NHS Scheme to have liabilities of over £526 billion. It therefore looks unlikely the government will make major pension tax rules reform any time soon.
At a personal level, the immediate need is to identify if you have a TAA and if you owe tax for previous years. The NHS scheme administrator must automatically notify you if you exceed the standard annual allowance of £40,000, but this is per scheme 1995, 2008 or 2015 sections and they only know about your NHS income.
The TAA is personal to you depending on your overall income. If your pension input amount is more than your personal TAA, you could have tax to pay without knowing or being informed by the scheme! It is imperative you know and understand your own individual position.
The next decision you face is how you pay any tax due, and there are two methods; either directly via your self-assessment or Scheme Pays Election. If you elect for Scheme Pays your final benefits will be permanently reduced. The reduction will be based on the amount paid to HMRC for Scheme Pays and then subject to interest until the benefits are paid at retirement.
Once you have declared any tax owing plus potential late submission or interest, the next stage is to look forward and understand the full implications for your own retirement. The focus to-date has been on the more immediate AA, but there is a second potential tax at retirement that should not be overlooked, the Lifetime Allowance.
Electing for Scheme Pays for any AA tax charge, the accrued debt will reduce your lifetime capital value at retirement and therefore reduce your exposure to the LTA. It is important that both taxes are considered when assessing your pension options today and should not be looked at in isolation.
The government is also proposing to help increase flexibility and introduce other measures which have been outlined in the Department of Health & Social Care’s latest consultation document – NHS Pension Scheme: pension flexibility 11 September 2019. The proposals (not exhaustive list below) are intended to address stakeholder concerns around “the need for wider flexibility to avoid perverse incentives which can cause senior medical staff to reconsider whether or not they can afford to provide additional patient care”.
- Choose a personal accrual level and pay correspondingly lower employee contributions. For example, 50% accrual with 50% contributions, 30%:30% or 70%:70%.
- Fine tune this during the pension year, updating the chosen accrual when clearer on total income.
- Ancillary benefits such as ‘death in service’ life assurance and survivor benefits would continue in full.
- Phasing the ‘pensionability’ of large pay increases for high-earners.
- Make the impact of Scheme Pays election clearer by including the pension debit on Annual Pension Statements so that members can see the adjustment to their pension at retirement.
- Provide access to high quality education and information (do not constitute as financial advice).
The Department of Health & Social Care intends that this support will be available from the end of this calendar year, subject to the outcome of this consultation, for introduction of the new NHS pension scheme flexibilities by April 2020.
Looking forward together we can help you to navigate these complexities, potentially work to your desired retirement age, increasing sessions as required, apply for discretionary points and be appropriately rewarded for your outstanding patient work.
At Tilney we have specialist Financial Planners who help NHS professionals with the unique challenges they face when it comes to their pensions and retirement planning. To find out how we can help you, contact your dedicated contacts Graham MacLeod on 0141 227 8018 firstname.lastname@example.org or Chris Tait on 0141 227 8005 email@example.com
Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change.