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Understanding the NHS pension review

As a member of the NHS pension scheme you will be accruing benefits according to a set formula, although from time to time an NHS pension review will occur which changes certain elements of the scheme. If you are concerned about the effect that changes in NHS pensions contributions will have on your annual pension accrual you should seek a specialist source of NHS pension advice.

The Government have recently conducted an NHS pension review which has resulted in significant changes to public sector pension schemes which will affect virtually all doctors. In addition there have been significant tax changes, which are beginning to impact on annual pension accrual and the tax relief received from making these contributions.

This has led the NHS pension advice agency to issue annual pension statements to members of the pension scheme which enables NHS employees to prepare for potential tax issues arising from pension accrual. The NHS pension advice will prevent doctors from breaching the Lifetime Pensions allowance.

Consequences of the NHS pension review

As a consequence of the NHS pension review virtually all NHS doctors will have to analyse their pension position every year to ensure: This can be a complicated area and without dedicated NHS pension advice some members will potentially struggle.

We believe the following brief explanations will help. If you would like your own benefits tested, please click here and you will be redirected to a firm of specialist NHS pension advice experts who will be able to help.

Is your Lifetime allowance a Life Sentence

Pension Lifetime Allowance

The Lifetime allowance is the maximum value of pension/lump sum that an individual can take from their pension arrangement without incurring a tax charge.

The Lifetime Allowance is currently £1.8M, but will reduce to £1.5M with effect from 6th April 2012.

If all your pension funds taken together have a value in excess of 1.5 million in 2012/13 then when amounts are paid out of the schemes (a benefit crystallisation event) you will be taxed on the excess over £1.5 million.

The tax payable is 55% of the excess if taken out as a lump sum or 25% if only a pension is taken.

The pension pot can be made up of Personal Pensions and the NHS Pension (As the NHSPS has no actual fund of invested money the value of the fund is calculated at 20 times the pension entitlement plus the lump sum payable.)

Example

Dr Jones has the following pension funds Calculation of Lifetime Allowance
The tax charge on the £315,000 excess above the new Lifetime Allowances would be: Please note Income Tax will also be payable at your highest marginal tae on income taken.

Primary, Enhanced and Fixed Protection

Primary and enhanced protection were introduced in 2006 along with the lifetime allowance in an attempt to protect members who's benefits may breach the limits. Those with no protection currently have until 5th April 2012 to make the decision on whether or not to apply for fixed protection. In many cases it will be a straightforward decision, however, for those with mixed benefits, it will be complicated by the uncertainty of investment returns and the increase in Defined benefits.

Benefit Crystallisation Events

There are various times when pension benefits are tested against the lifetime allowance, called Benefit Crystallisation Events

This will normally be when benefits are taken.

How does age 75 affect pensions

When an individual commences Pension Drawdown on or after 6 April 2006, there is a test against the lifetime allowance. If this is prior to age 75, there will be a second test at age 75.(or at the date they buy an annuity if earlier). Individuals already in drawdown, need to consider whether or nor they apply for Fixed Protection if their fund or any pension benefits elsewhere ( including NHS Pension benefits) is likely to exceed the £1.5M at age 75.

Conclusion

It is vital to determine your current Lifetime Allowance situation and how that might impact on your Pension planning. It might be that:-
  1. You stay in the NHS scheme but don't apply for fixed protection
  2. As above, but increase the cash to the maximum available under HMRC rules
  3. Stay in the Scheme, apply for fixed protection- consideration has to be given to any personal pension benefits
  4. Leave the scheme and apply for fixed protection


Critical Information About Your NHS Pension


The Annual Allowance

How does this affect Members of the NHS Pension scheme?

Whilst the NHSPS is a Defined Benefit Scheme (i.e.) a pension scheme which guarantees certain benefits on retirement. The pension benefits increase each year with the members service. This increase in service is now triggering a potential Tax Liability for certain members.

The formula to calculate this potential annual pension increase is complicated, especially for GP's and Dentists, who accrue benefits within a dynamised pool of pension entitlement. To perform the calculation, it will require the member to:- Example

Dr Jones has at 1 April a notional Pension Pool of £1,750,000

After applying the Dynamising and incremental factors, he has and opening figure of £479,930

However, Dr Jones has high pensionable earning during the tax year, so his notional
Pension Pool stands at on 31 March the following year. £2,000,000

Applying the dynamising and incremental factors his closing figure will be £532,000

Difference £52,070

Less Annual Allowances £50,000

Tax Charge £2,070

Tax payable if no reliefs available 2,070 @ (probably) 50% £1,035

Reliefs available are any unused Annual Allowance below £50,000 from the previous three years.

If you have or are still making contributions to a Personal Pension, things become far more complicated, as these benefits have to be entered into the calculation. Pension input data can wildly effect the final tax liability and care has to be taken that these figures are correct

Conclusion

It is apparent from that you are likely to be at risk if
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