Doctors’ Pensions Crisis: Key Facts
Doctors’ pensions are big news at the moment. Wherever you look, there is someone telling you that you are not saving enough, or saving too much, or doing something wrong. With many healthcare practitioners paying into both an NHS pension and a private pension, the situation is even more complicated.
Get two or more medical consultants in a room, and chances are that the conversation will soon turn to what is becoming known as ‘the NHS pensions crisis’. Instead of eyes glazing over, the discussion becomes animated. Stories are shared of colleagues who have been unexpectedly hit with large tax bills, who are retiring early or are cutting back on clinical work at the peak of their clinical careers and seniority to avoid this.
It is always worth taking professional advice about these things. With the help of Nick Shioleftou, Director of NPS Wealth Management, Senior Partner Practice of St. James’s Place Wealth Management, we’ve sorted the wheat from the chaff to work out what you really need to know, and how to avoid problems.
What is the lifetime allowance?
The lifetime allowance is the total amount that you can accumulate in your UK pension funds without being subject to an excess tax charge. It is effectively a limit on what you can hold in pension funds. It applies to the total value of all your pension pots, including final salary schemes, but excludes the State Pension. At the moment, the lifetime allowance is £1,055,000, and it is set to increase each year in line with inflation.
Does that mean that I can pay £1,055,000 into my pension over the course of my working life?
No. The lifetime allowance is the limit on the combined value of your UK pension pots when your pension benefits are withdrawn. If your pension providers are doing their jobs, your pension should be growing all the time. The precise growth will depend on the performance of the underlying investments, but with investment growth over your working life, you could be affected by the lifetime allowance even if you have paid in considerably less than £1,055,000.
What happens if I exceed the lifetime allowance?
It’s quite complicated. There is likely to be a tax penalty when you withdraw your savings, although the precise amount will depend on whether you withdraw the excess as a lump sum or as income.
Am I likely to exceed the lifetime allowance?
Nick notes that the lifetime allowance has the potential to wrong-foot many individuals in both the public and private sectors.
“Even if your pension savings are well below the lifetime allowance, a combination of good investment returns and future pension contributions could mean your pension savings exceed the limit well before retirement.”says Nick Shioleftou.
One estimate suggests that individuals in final-salary schemes are likely to have problems if they have pension rights valued at more than £52,750. Other estimates have said that those with incomes above £80,000 should be alert for issues. This is likely to affect most full-time NHS consultants, particularly those also working privately.
What is the annual allowance?
The annual allowance is the total amount that you are allowed to pay into your pension in a single year, and still receive tax relief. It can vary, and also depends on whether you are paying into a defined contribution or defined benefits scheme. If a defined contribution scheme, your contributions are capped. If a defined benefits scheme, however, the annual increase in the value of pension rights is capped. The cap is currently £40,000.
Is this the same for high earners?
No. There is a tapered annual allowance for those earning more than £150,000 per year. For every £2 you earn above £150,000, you will lose £1 of your annual allowance, up to a maximum of £30,000. So those with adjusted earnings of £210,000 can only pay in £10,000 per year. This is likely to be an issue for doctors who do both private and full-time NHS work.
What happens if I exceed the annual allowance?
You will have to pay an annual allowance charge. This is added to your taxable income for the year, and used to determine your tax liability. If it comes to more than £2,000, you can ask your pension providers to pay the amount out of your pension pot—although of course, that will reduce your potential benefits in the future.
Why is this a problem?
This is an issue for several groups. First, it’s a problem for anyone who has chosen to take time out early in their careers for any reason—to look after children, for example—and then ‘make up time’ later. The annual allowance means that it isn’t really possible to fully top up your pension. Second, it’s an issue if your income fluctuates from year to year. You can’t pay a lot more into your pension pot in a good year to cover future ‘lean years’—although you can carry forward unused annual allowances—and it is hard to take full advantage of your greater ability to earn towards the end of your working life. And third, it’s a big issue for doctors working in the NHS because of the defined benefits pension. The generosity of the NHS scheme means that you can end up incurring tax charges that take a big chunk out of your income, but many years before you want to take your pension. This is reportedly why many NHS consultants are choosing to take early retirement.
What can I do to avoid problems with my pension?
The most important thing is to keep the value of your pension savings under review. For those in the NHS pension scheme, you can start by requesting your latest statement from NHS Pensions to discuss with a financial advisor – this can take several weeks to receive. You should always seek professional advice, rather than trying to work out the right course of action yourself. This will help to avoid surprises around tax.
For example, it might be OK to breach the lifetime allowance in certain circumstances—it really depends on your personal circumstances. There are some Government pension protections that can help and alternative ways to fund your life after work.
“A review will help determine if you, or your employer, should continue to fund your pension,”says Nick Shioleftou.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.
NPSWealth Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products. The titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
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