Are you aware of the major changes to pension taxation to come into effect from 6 April 2016? Could you be caught by the changes to the annual allowance (AA) and lifetime allowance (LTA)? A number of GPs and NHS Consultants who have a long service in their pension scheme and are on a high salary or who receive a promotional salary increase could very well be impacted by the changes, without even realising so.
Emergency Budget 2015
The Chancellor of the Exchequer’s summer Budget of 2015 (08/07/2015) - the first of this new parliament – included a number of announcements in relation to the taxation of pension savings. The tapered reduction in the AA from 2016/17 was widely expected given that it was in the Conservative manifesto, and will hit high earners particularly hard.
From the 2016/17 tax-year, the current AA of £40,000 will be tapered for anyone whose total income (including the value of pension savings and investment income) is above £150,000 – so that if total income is over £210,000, the AA will be cut to £10,000. Individuals with income (excluding pension savings) below £110,000 should not be affected.
These reductions in the AA for higher earners come on top of the previously announced reduction of the LTA from £1.25m to £1.0m from 2016/17. The LTA stood at £1.8m for 2011/12, before successive reductions to £1.5m, then to £1.25m and now to £1.0m from 2016/17.
"From 6 April 2016 any increase in accrued pension in excess of £625pa (after CPI inflation) will incur an AA charge for individuals with total income, including pension savings, of over £210,000"
Tax consequences of reduced pension allowances
The reduced AA and LTA will have major tax consequences on GPs’ and NHS Consultants’ pension savings, both while accruing benefits and when drawing benefits at retirement. For example, from 6 April 2016 any increase in accrued pension in excess of £625 p.a. (after CPI inflation) will incur an AA charge for individuals with total income, including pension savings, of over £210,000. The AA charge will be at the individual’s marginal rate of tax, i.e.45% for this level of earnings. Substantial tax charges will also be levied when benefits are drawn at retirement, where the pension benefits exceed the LTA.
There are various ways to mitigate the full effect of the reduction in lifetime allowance, although there are potential drawbacks. Individuals should consider whether any of the expected new LTA protections – Fixed Protection 2016 or Individual Protection 2016 - would be suitable for them. Individual Protection 2016 would be an attractive solution for individuals in the NHS scheme as they, like most public sector workers, are unlikely to receive any alternative remuneration from their employer if they opt-out of their pension scheme. They would however need pension savings of at least £1m as at 5 April 2016 to qualify for Individual Protection 2016 (or pension savings of at least £1.25m as at 5 April 2014 to qualify for Individual protection 2014).
The big question for many members in the NHS pension scheme who will face steep AA tax charges every year and an LTA tax charge when they draw their benefits is whether or not they should even continue with pension savings? Anyone who thinks they may be impacted must take advice and should also consider the effect on other benefits, such as ill health and death in service benefits, if they were to opt out of the NHS pension scheme.
It is important that a detailed cost/benefit analysis is undertaken and for some it may still be beneficial to remain in the NHS scheme and for others the cost of staying in the NHS scheme may be substantially more than the cost of leaving.
This blog originally appeared on the Medeconomics website.
This blog is for information only and should not be construed as advice.