Better pension news
Over the last few years, there have been many articles written about the tax charges around pensions and usually these have been delivering bad news. The last 12 months have been tough for everyone, but at least there has been plenty of good news on the pensions front, reports Ian Tongue.
Pension annual allowance
After many years of having to navigate around pension tax charges and tapering of the annual allowance, it still surprises me how many new clients come to us from accountants who have little or no idea about it.
Even worse is the client who thought they would save money and prepare their own tax return and ignore the tapering.
The pension annual allowance is still £40,000 a year, but the big change is that the earnings level where the reduction or tapering of this allowance starts has increased from £110,000 to £200,000.
This applies from the 6 April 2020 and is a welcome change. This new threshold provides greater scope to take planning steps to retain the full allowance.
A sting in the tail on this is that the previous minimum annual allowance that you could have was £10,000, but this has now been reduced to £4,000, which effectively prevents higher earners from having much tax relief on their pension savings.
Pension tapering
The original threshold for pension annual allowance tapering of £110,000 resulted in significant amounts of doctors incurring an annual allowance charge.
While waiting list work within the NHS was not additional superannuable income, the effect of having higher earnings was often the catalyst for incurring a tax charge. This became a disincentive to work and the waiting lists started to climb.
With an increase of the tapering threshold to £200,000, it has resulted in a significant amount of doctors no longer facing annual allowance tapering.
And for those with earnings above this sum, due to carrying out private work, tax planning opportunities exist to retain your full allowance.
For those still affected by annual allowance tapering, the calculation is the same as before, whereby you add earnings and pension savings together to determine how much of your allowance is retained.
However, instead of the minimum allowance being £10,000 this is now just £4,000. So if you are in this position, it is important to discuss your options with an accountant who understands the NHS Pension Scheme.
Pension growth
When comparing your annual allowance to your pension savings, it is important to understand that the NHS Pension Scheme is a special type of pension scheme.
Most pension schemes are investment funds and the value could go up or down. In this scenario, how much you contribute into the scheme is your pension savings.
The NHS Pension Schemes are different, as what you put in is your contribution to be a member of the scheme and what you get out is based on a formula.
For the 1995 and 2008 schemes, this is based on length of service and earnings, although the calculations differ. For the 2015 Pension Scheme, your career average earnings are used to determine pension benefits.
For those doctors who were moved into the 2015 on or after 1 April 2015, your current earnings are relevant for both your 2015 pension growth calculations and for your calculations under the 1995 and 2008 schemes.
Depending on which scheme you are a member of, your annual pension growth can be hugely different.
Factors such as pay increments and changes in roles can have a significant impact on the calculations and therefore before making any changes to your role, it is always a good idea, again, to discuss the impact with your accountant.
Paying annual allowance charges
Where a tax charge is incurred, you have the option of paying this through self-assessment or asking the pension scheme to pay the charge, which is known as a ‘scheme pays’ election.
Paying through self-assessment gets the charge out of the way, but it does have the effect of increasing payments on account and therefore the tax may be more than you are expecting.
This can, of course, be reviewed if the payments on account would be too high for the following year.
Using the ‘scheme pays’ facility is effectively a loan arrangement behind the scenes, but instead of this being repaid or deducted against your pension in one amount, there is a formula to determine how much of your eventual pension you will lose.
The loan carries variable interest at a percentage above inflation with the interest rate currently at 2.4%, but it has been as high as 3% above inflation.
Again, as part of the measures to try and get doctors performing waiting list work, there is a special arrangement for 2019-20 in relation to using the ‘scheme pays’ facility.
While the system itself is identical to earlier years, there is a ‘promise’ to make good the effect of using the facility for the 2019-20 year only.
The exact mechanics of this has not been seen yet, but there is an overriding principle that members using the facility for 2019-20 will not be financially disadvantaged, so it is seen as good news.
The BMA has frequently-asked questions and further information regarding this facility on its website for those unsure of whether to take this option.
Pension lifetime allowance
There has been no change to the lifetime allowance, which is how big your pension can be before triggering a separate tax charge.
Often the level is viewed as a ceiling. This is not the case, but it is fair to say that the value-for-money calculation of additional pension growth is reduced once you start incurring lifetime allowance charges.
The current level lifetime allowance level is £1.073m, so speak to your independent financial adviser to understand your position.
Pension reform
To complicate matters, consultation ended in October to allow members of the 2015 NHS Pension scheme a choice to roll back into the 1995/2008 pension scheme for the period 1 April 2015–31 March 2022.
From 1 April 2022, it is proposed that everyone who is a member of the NHS Pension Scheme will be in the 2015 pension scheme or equivalent.
This is generally seen as particularly good news, but the impact on each member needs to be considered independently.
At the time of writing, the final document has not been issued, but it is proposed to allow members to elect early for this treatment or wait until retirement and select the best option.
Hopefully, there will be options here for those who do want to secure this treatment, but whether a decision is made before or at retirement, if the outcome is to go back into your legacy scheme, then all of the pension growth calculations will need to be revised.
This could mean that tax has been suffered or could mean that tax is payable. The consultation proposes an unlimited period for the taxpayer to go back and recover tax, but only a four-year window for HM Revenue and Customs.
It remains to be seen what the full options will be, but one thing for certain is that you will need a specialist medical accountant and independent financial adviser to guide you through this process.
Pensions have been a sore point for many years, with governments making many changes to public sector pensions.
The good news is that, for many, the risk of paying tax for breaching an annual allowance has reduced significantly and pension reform is on its way to give members some welcome options regarding their NHS pension.
Ian Tongue (right) is a partner with Sandison Easson specialist medical accountants