The Chancellor, Jeremy Hunt, has recently announced major changes to pension legislation that will have a significant impact on members of the NHS Pension Scheme. The changes include an increase in the Annual Allowance and the abolition of the Lifetime Allowance. While these changes will have largely positive implications for NHS pension scheme members, they will require many to review and reconsider their pension and retirement strategies.
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Abolition of Lifetime Allowance
The Lifetime Allowance (LTA) has been abolished by the Chancellor. The LTA, which places a limit on the total amount of pension benefits individuals can accrue during their working life without suffering tax charges upon retirement, has been frozen since April 2020. This has led many doctors to reduce their hours or leave the medical profession altogether. With effect from 6 April 2023 there will be no LTA tax charged, eliminating the threat of significant tax charges for medical professionals whose pensions exceed £1.073m. This has the positive impact of increasing benefits payable at retirement.
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Increase in Annual Allowance
The Annual Allowance, which limits the amount of pension growth individuals can achieve each year, has been raised from £40,000 to £60,000. This change will take the vast majority of doctors outside of the scope of Annual Allowance tax charges in most years.
The tapering of the Annual Allowance, however, will continue to affect those with income over £200,000, leading to significant tax charges for the highest earning doctors.
The budget also changed rules to assess the overall pension growth across the whole scheme rather than look at each section differently. This deals with the issue of “negative growth”.
The legislation has also encouraged many doctors to retire early, reduce sessions or opt out of the NHS Pension Scheme.
Other Recent Announcements
In addition to the recent Budget announcements, other changes specific to the NHS Pension Scheme have been announced. These include CPI alignment, new Retirement Flexibilities, and McCloud updates.
CPI Alignment
The government has announced that it will tackle the Annual Allowance problems caused by a misalignment of CPI figures and rising inflation. This will be achieved by having no CPI escalation in NHS pension benefits for members of the schemes in England & Wales in the 2022/23 tax year by moving the date the uplift is applied in the scheme to 6 April. Thereafter annually the CPI uplift allowed by HMRC in any tax year will align with that used by the NHS Pension Scheme to uplift benefits. A similar change has also been announced in Scotland and Northern Ireland.
Retirement Flexibilities
The NHS Pension Scheme has announced the introduction of two options over the next six months, creating more flexibility for people wanting to access their NHS pension while continuing to work within the NHS. The options include Retire and Re-join and Partial Retirement, allowing individuals to take their pension benefits while continuing to work.
Considerations for Medics
The changes announced are positive in that it will change how the annual allowance is calculated which should reduce growth calculations in years of high inflation. In addition the raising of the allowance to £60000 will remove many from being exposed to a possible tax charge.
The change to the LTA will mean that most doctors will get a higher pension than under current rules.
However, it will create further considerations for individuals and emphasize the need for specialist NHS Pension advice. These considerations include whether those who have opted out of the scheme need to revisit that decision, if doctors can increase their sessions worked without being concerned about pension taxation, if people about to retire need to revisit the retirement date to ensure benefits are maximized, what those earning more than £200,000 should do and whether there are uses for Limited companies to help plan, and whether certain doctors should now be looking at contributing to private pensions to utilize their available allowances and maximize their tax positions.
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