The Annual Allowance Maze
You will have read numerous articles about the challenges posed by the Annual Allowance and specifically the introduction in the 2016/17 tax-year of tapering of this allowance. As a reminder, the allowance can fall as low as £10,000 for Consultants and GPs with Threshold Income over £110,000 – this income includes any other salaried posts, rental income, dividends and investment income.
Many individuals will by now be aware they have moved to the 2015 Scheme with the benefits accrued in the previous schemes, 1995 or 2008, now frozen until retirement. However, a valuable concession agreed by the Department of Health when the new scheme was introduced, was to retain a final salary link to the 1995 or 2008 Schemes. For those in the Practitioners Scheme this means that GP Flexibilities are retained. Whilst this will ultimately result in a higher overall pension than without the link, it does mean that any member of the NHS Pension Scheme who has moved to the new scheme will be using part of the Annual Allowance within the old scheme, leaving less to use against the 2015 scheme. The complexity of the NHS Pension Scheme is beyond that of any other pension scheme we advise on, with factors such as the length of time salaried work occurs alongside practice profits, changes to seniority and the retirement of a partner all contributing to significant increases in your pension growth (the amount of Annual Allowance used).
It is this complexity that makes it so important active members of the scheme seek specialist financial advice. We appreciate any additional cost is unwelcome, but the reality is that the cost of not seeking advice will be much higher.
For the last 10 years most of the enquiries we have received have related to the Lifetime Allowance, how to avoid exceeding it and what the implications are. Our view is that the Annual Allowance is now the far bigger threat. For example, exceeding the Lifetime Allowance by £50,000 would result in your monthly NHS pension being reduced by £50 when you retire. The same excess against the Annual Allowance would result in a tax cost of £22,500 – payable after 9 months!
Pension growth letters (Annual Allowance Pension Savings Statements) are sent by NHSPA, but only to members they expect to exceed the standard Annual Allowance. Without knowing each member’s total earnings, it means that some members are accumulating tax charges that they do not know about.
Our view is that they should be sent to every member of the pension scheme and for this reason we advise all clients to contact the NHS Pension Agency and request a pension savings statement.
This will be accurate to the 2017/18 tax year for GPs and 2018/19 tax year for consultants and has vital information which is needed to estimate how significant the risk is of exceeding the Annual Allowance. A GP may not receive their statement until after the Scheme Pays Deadline has passed so it is vital you seek advice as early as possible. This, along with your current Total Reward Statement, are the key documents needed before you approach an adviser.
We strongly recommend all members of the pension scheme request a Total Reward Statement, www.totalrewardstatements.nhs.uk and call the NHS Pension Agency to request a pension savings statement. Once you have these, contact Tom Bate at Tempus Wealth for specialist NHS financial advice.
You can book a free no obligation consultation with Tom and the Tempus team via Medics’ Money by clicking here
