This is a ‘hot topic’ in many GPs’ minds and I suspect that many sessional doctors will just think it won’t apply to them. Whilst for younger, low earning NHS scheme members this may be true at the moment, there will be some it might affect.
In simple terms the new rules are:
Annual allowance of £50,000. This is the level at which, effectively, you can get tax relief. It is based on ‘pension input’ not pension contributions paid.
Pension input is the value of the increase in pension benefits earned during a fiscal year after allowing growth by CPI (consumer price index) on the value of the fund at the beginning of the year. There is not space here to show the calculations – but it usually comes out at more than contributions paid. For salaried doctors, a pay rise can cause a substantial increase in ‘pension input’ which can easily exceed the annual allowance. The BMA has written to members with examples of how this works.
Where the annual allowance is exceeded in a tax year, one may look back at the past 3 years to see if there is any cumulative unused allowance to offset the excess. If it covers it, then there is no tax liability; otherwise you are taxed on the excess over £50,000 at your top rate of tax. Where the liability is substantial, the pension fund will be able to meet it – and this will then, of course, reduce the pension available on retirement. The rules for this are still under debate.
The Lifetime Allowance is currently £1.8million and will reduce to £1.5million from April 2012 – with no plans to increase this in the short term. A pension pot of £1.5million equates to a pension of approximately £65,000 (calculated at 23 x pension for the lifetime allowance value). Where the lifetime allowance is exceeded, then there is a tax charge on the excess of 55% or 25% - depending on whether the excess is taken as on a lump sum or as a pension. Mid to high earning doctors will probably exceed the limit by retirement; younger ones will begin to be affected the longer the limit remains fixed.
If you are about to become a GP principal it becomes even more complicated, and sometimes the first year as a practitioner can give unusually high pension input figures when previous employments are taken into account.
If you have been a GP practitioner, note that the lifetime allowance is not the same as your dynamised pension pot.
What should you do
It is worth getting a pension projection with a full earnings record to check that all your earnings are correctly included. Where doctors move around employers/PCTs it is easy for periods to get ‘lost’. Your specialist accountant may be able to help you to review your record and estimate your situation going forward.
Once you know that the record is correct, if you think you may be anywhere near the above limits seek professional advice. Otherwise, just keep your records up to date from year to year. NHS Pensions will send you a certificate of pension input each year in the future if relevant. We don’t know what format these will take yet – or how easy it will be to check the figures.
If you think that you will exceed one or other limits:
Seek professional advice from an independent pensions expert who is a specialist in the NHS Scheme – normally your accountant will not be permitted to give this advice, but they may have an in-house IFA.
Do not make a hasty decision to leave the scheme. In many cases, the scheme may still be best value even if you have to pay additional tax. That may change if, as expected, contribution rates increase – so you will need to take further advice at that stage.
Liz Densley is medical specialist partner with Sussex Chartered Accountants, Honey Barrett, and is secretary of AISMA (the Association of Independent Specialist Medical Accountants). Contact her at firstname.lastname@example.org.