The ever changing and confusing "Superannuation Maze" for Doctors

The ever changing and confusing "Superannuation Maze"

- What are your choices?

The NHS pension continues to provide significant and valuable benefits for its members; however in these days of “austerity”, successive Governments appear to be trying to "tax doctors though the back door" and are reducing the thresholds when tax becomes payable.

In the tax year 2011/12, the lifetime allowance for the notional value of your pension benefits was £1.8 million.

In this current 2014/15 tax year the lifetime allowance is £1.25 million.  Unless you have applied for protection of your lifetime allowance any excess value will incur a tax charge of 55%, if taken as a tax free lump sum, or 25% if taken as additional pension income.

Not only have these restrictions been imposed on your actual final "retirement pot", but the annual amounts on which you are eligible to receive tax relief have also been dramatically reduced.

BE AWARE and perhaps BEWARE?

In the tax year 2011/12, the annual allowance for the notional increase in value of your NHS benefits plus private contributions was £255,000.

In this tax year, the annual allowance has been reduced to a meagre £40,000

Unless you have unused pension allowances from previous years, any excess "annual increase in value of your pension" (n.b. NOT excess payments to your scheme) will be added to your gross income, and additional tax would need to be paid at your higher rate of tax.

One of the most common questions asked of us is “what should I do?”

Therein lies an immediate problem, because we as accountants are forbidden to advise specifically about pensions, unless we have an IFA qualification, and unfortunately we realise too few IFAs actually understand the complexities of the NHS superannuation scheme.

Luckily for us we use IFA Simon Blowen from Positive Solutions who specialises in this area, and he has helped us put together this summary for you.

So let us start - Each Doctor will have their own unique personal and financial circumstances. The priorities of a doctor with a young family will be completely different to a doctor nearing retirement with no dependants .

Because of the numerous HMRC protection rules (both past and present) and tax saving opportunities available to reduce the impact of a lifetime allowance charge at retirement, the importance of specialist financial advice has never been more crucial.

Working closely with an independent financial adviser (like Simon Blowen who understands the NHS scheme) will help you answer these questions.

·         Should I elect for the scheme trustees to pay any annual allowance tax charge?

·         Will the new Individual Protection 2014 be applicable to my pension?

·         I am thinking of opting out of the NHS scheme what are the implications?

·         What other benefits apart from a pension does the NHS provide and what is their value?

·         I have private pension schemes, how do these affect my benefits?

·         Should I take early retirement?

·         What are my options to avoid a lifetime allowance tax charge?

With the intricacies of the GP superannuation scheme, together with numerous HMRC rulings throughout these past few years, what is suitable advice for one individual is just as likely not to be relevant to another individual.

For example - some Doctors have been,  or are considering, opting out of the NHS scheme for periods of time in a year, simply in order to avoid exceeding the £40,000 annual allowance, and thereby trying to avoid suffering tax on the excess.

If you are thinking about doing something similar, you need to take care.

Apart from the fact you would be estimating your pensionable earnings for the year, extreme caution should be taken regarding the reduction of death in service benefits, dependants pensions, and loss of ill health early retirement benefits.

Remember those in the private sector have seen dramatic falls in annuity rates and investment returns and that the NHS pension still continues to provide valuable benefits and protection for its members.

Individual Protection - NOW

Anyone who has total pension benefits worth more than £1.25 million on 5th April 2015, and doesn't have Primary Protection, can register for Individual Protection. And they should.

For the vast majority, there's no downside to registering for Individual Protection. It gives an increased Life Time Allowance (LTA) with no trade-off.

By having Individual Protection, your personal LTA is set at the value of your pension benefits on 5th April 2014, up to a maximum of £1.5M.

For example someone with pension savings worth £1.4M on 5th April 2014 can lock into a personal lifetime allowance of £1.4M. But someone with savings worth £1.6M would secure a £1.5M allowance. As this personal LTA is higher than the standard LTA, it can reduce the liability to a lifetime allowance tax charge when benefits are taken saving thousands if not tens of thousands of pounds.

If you've already registered for Enhanced or Fixed Protection (2012 or 2014), this new protection can sit behind those protections, giving a useful safety net to fall back on if your headline protection is lost.

Unlike Enhanced or Fixed Protection, Individual Protection won't be lost if further contributions are made to money purchase schemes or if benefit accrual occurs under defined benefit schemes which has been the problem for GP’s in the past.

So Individual Protection allows you to continue to enjoy NHS pension provision or maintain other valuable scheme benefits like death-in-service cover and ill health early retirement.  New schemes can be joined without fear of losing this protection - an important consideration in the post auto-enrolment world.

Remember if you have existing enhanced or fixed protection this will be lost if you join or are auto enrolled into a new scheme.

In order to complete the HMRC online submission for Individual Protection you will need to know the value of your accrued NHS pension benefits as at 5th April 2014. In addition if you have any private pension schemes their values on this date will also be required in order to complete your registration.

You have until 5th April 2017 to register, allowing for correct pensionable earnings for the last tax year to be submitted and NHS Fleetwood to provide statements with the correct updated dynamised earnings.

ACTION POINTS FOR YOU

1. You need to identify your "accrued NHS Pension Benefits" to date, by asking NHS Superannuation office at Fleetwood for your latest scheme valuation, and share this with your accountant as soon as possible.

2. If you are contributing to Private Pension schemes (even though you will be ineligible for Enhanced or Fixed Protection) you should ask for the latest valuations of these private pension benefits to share with your accountant and specialist IFA.

3. Once you know the value of your pension benefits are in excess of £1.25million you should apply for "Individual Protection". Remember the NHS pension department are as yet unaware of your pensionable earnings and therefore unaware of your accrued pension at this time, and

4. Get your accounts and tax return information  in quickly to your accountants to give them a chance to declare your net earnings to the relevant pension bodies in time

 

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