This year's budget announcement means you may need to apply for IP14 or IP16 pension protection.
Despite all the rumours in the press about further changes to pension rules which ranged from abolishing the much-loved tax-free lump sum from your pension, to abolishing tax relief altogether, the Chancellor made no new changes. Whether he is afraid of Boris Johnson and his desire to be prime minister or he had a change of heart, I think that further change is inevitable. We may have seen a glimpse of this with the introduction of the new lifetime Individual Savings Account (LISA) from next year.
The Government are ploughing ahead with the planned changes to the Lifetime Allowance (LTA) and reductions to the Annual Allowance (AA). If you were born after August 1965 then you will have benefits in the 1995 scheme which still has a retirement date of 60 but you joined the 2015 scheme on the 01/04/2015 which has a retirement date linked to the state pension age which will be 67 for many of you and the earliest you can access the pension is age 57. So with all the tax changes, and depending upon when you want to retire, is it worth still being a member of the 2015 scheme? If you were born before April 1962 then you are lucky as you will remain in the 1995 scheme. If you were born between these two dates then you will be phased into the new scheme.
Lifetime Individual savings account (LISA)
From the tax year 2017/18 you will be able to save up to £4,000 per year to this new ISA and the Government will top it up by 25%, so £5,000 will be invested. If the money is used by a first-time house buyer or you keep the money invested until the age of 60, then you keep the 25% bonus. You have to be under the age of 40 to do this and you can’t pay in past the age of 50. If you take the money out for any other reason then you lose the Government top up, but it is still tax-free. Now, this looks a lot like a combined ISA and a pension. Is this the shape of things to come?
Lifetime allowance (LTA)
This is the amount of money you are allowed to have in your pension pot when you retire before the Government applies a tax charge. This is at an effective tax rate of 55% although it is not applied this way in practice. The LTA was originally £1.8m and to break that limit your pension would have to be more than £78,261 under the 1995 scheme. You may be able to apply for protection if you have not done so already. The two forms of protection that you can have are Individual protection 2014 and 2016 (IP14 IP16).
Individual protection 14 (IP14)
If your pension was valued at more than £1.25m as at the 05/04/2014 then you have until the 05/04/2017 to apply and protect that pension, and this will be the limit that you are tested against when you come to retire. Your accrued pension would have to be more than £54,378 at that point and you can protect up to £1.5m.
Individual protection 16 (IP16)
The online forms will be available in July 2016. The LTA is being reduced to £1m from the 06/04/2016 and to break this limit then your pension has to be more than £43,478. By applying for protection you could avoid the tax charge which could reduce your pension by as much as £6250 per year.
Annual allowance (AA)
This is the money that you are allowed to save each year before the government applies tax charges for breaking the limit. The limit was £50,000 and it is now £40,000 and for some high earning GPs it could reduce to as little as £10,000 from the 05/04/2016. Under the 1995 scheme, and ignoring the effects of inflation, a £1000 increase to your pension could use up £19,000 of annual allowances. It is possible for the scheme to pay the tax charge if the tax is more than £2,000. The excess amount is treated as extra income and taxed at your marginal rate of tax, so a £10,000 excess for a 40% tax payer is a £4,000 tax bill. Depending on your age, if you have benefits under the 1995 and 2015 schemes then in total you may break the AA, but you may not be able to get the scheme to pay.
- Find out what your pension is worth as at the 05/04/2014 and 2016, and apply for protection ASAP
- Where are you with the AA and how will the changes for high earners impact upon you? Can you afford to pay the tax if the scheme cannot?
- If you have a sizeable pension under the 1995 scheme and you have AA or LTA issues, is it worth joining the 2015 scheme?
These are all highly technical issues and independent advice should be sought from a suitably qualified individual. Your pension should not be looked at in isolation and any decisions about opting out of the scheme or retirement should be based upon your whole circumstances. The NHS scheme not only provides a pension, it also includes ill health pensions for you and pensions for your partner and your children as well as 2 times your superannuable pay as a lump sum payment. As you would always say to a patient, please read the instructions carefully and take as prescribed!
Kevin Walker, NHS Pension Specialist, BW Medical Accountants. Blackett Walker is authorised & regulated by the Financial Conduct Authority.