Surprise changes to doctors pensions tax issues
THE BUDGET.
Lifetime tax-free pensions savings limits removed
By Robin Stride
Doctors are being advised to seek specialist help as they consider their position after the much-welcomed pensions tax shake-up announced in the Spring Budget.
They will no longer face a limit to their overall tax-free pension savings following the Chancellor’s announcement that the lifetime allowance will be abolished.
In a bid to retain older workers, particularly in the NHS, the lifetime allowance – which was due to be frozen at the current £1.073m until 2026 – will ultimately be removed altogether. In the interim, the tax charge for exceeding the allowance will be removed from April 2023.
Dr Benjamin Holdsworth
Dr Benjamin Holdsworth, a director of specialist financial planners Cavendish Medical, said: ‘There is a lot of detail to be checked and those planning retirement, particularly if doing so imminently, will have decisions to take and plans to update.
‘It is important to take some time to establish the best route for the individual. As ever, there are nuances that must be considered; one course of action may offer benefits on the one hand but be detrimental on the other. Please seek specialist help to avoid any pitfalls.’
Pre-Budget media speculation suggested the allowance would rise to match its peak of £1.8m, last seen in 2010-11, but Jeremy Hunt quoted that ‘no one should pull out of the workforce for tax reasons’.
Annual allowance raised
The annual allowance, which has been particularly punitive for senior doctors in recent years, will be increased by 50% to £60,000 from April. This means many doctors will no longer face substantial tax bills for breaching the yearly tax-free pensions savings limit.
In addition, the tapered annual allowance, which reduces the standard savings limit further on a sliding scale dependent on income, will now revert to its previous minimum amount of £10,000. The amount was reduced from this figure to £4,000 in 2020.
The ‘adjusted’ income threshold at which the tapered annual allowance applies will rise from £240,000 to £260,000 next month. Adjusted income includes not only workplace earnings, dividends from investments and property income but also NHS pensions growth and personal pensions.
While not declared at the despatch box, official Spring Budget papers confirm that the different sections of public sector pension schemes will be considered ‘linked’ for the purposes of annual allowance calculations. This means that negative pension growth in one scheme can be offset against positive growth in another.
Dr Holdsworth said: ‘These changes are substantial for doctors previously facing difficult decisions because of tax issues. Coupled with the new retirement flexibilities announced recently, many will have more options and positive opportunities to explore going forwards.
‘However, it will raise questions for those who have taken pension benefits recently under the current lifetime allowance regime, who almost certainly would have deferred doing so if given notice of these changes.’
One issue was not improved in the new Budget announcements. The maximum pension commencement lump sum (or ‘tax-free cash’) available when benefits are drawn for those without ‘protection’ schemes in place will remain at its current level of £268,275.
Only individuals who already have lifetime allowance protection in place will retain their right to take a higher tax-free lump sum.