Can you now afford retirement?
What now for pensions? Dr Benjamin Holdsworth gives you the detail behind the recent big announcements.
It has been an interesting few months for those doctors with NHS interests.
As specialist financial advisers, we have become all too accustomed to regulatory reform to your pay, pensions and tax rules over the last two decades, but the majority of the recent changes – reported by Independent Practitioner Today last month – have been positive.
The news that the Chancellor had finally acted to stem the exodus of senior clinicians leaving the NHS or reducing hours because of punitive pension taxes brought relief for many.
Jeremy Hunt announced he would end the tax charges on the lifetime allowance and would increase the annual allowance, reducing substantial tax bills on pensions growth in the process.
These key measures followed the conclusion of the NHS pension consultation which confirmed more flexible retirement opportunities in future.
So what do these developments mean and what are the important issues you should consider now?
Lifetime allowance
The lifetime allowance has not yet been ‘abolished’, but, instead, the tax charge has been removed until April 2024 when a Finance Bill should eliminate it completely.
This means there is no limit on pensions savings, but it should be noted that the pension commencement lump sum, or ‘tax-free cash’ as it is more commonly known, will be capped at its 2022-23 level of £268,275 – unless you have ‘protected’ a previous allowance limit.
This means you will be paying tax on the rest of the savings when benefits are drawn.
While a largely positive step, it does sadly raise questions for those who have taken pension benefits recently under the former lifetime allowance regime and who almost certainly would have deferred doing so if given notice. There has been no formal announcement of recompense for anyone in this situation.
Post-Budget, the Labour party announced that it would re-instate the lifetime allowance if it were elected at the next general election, due to be called by January 2025, but that medics could be made exempt from the limits, in a similar way to judges.
Pension ‘protection schemes’
At the end of March, the official Finance Bill was passed, which sets out how the new lifetime allowance rules will operate.
Specific regulations relate to pension ‘protection’ policies, which were introduced in various guises when the Government made cuts to the lifetime allowance. They safeguard a person’s former lifetime allowance figure provided set criteria are met.
In a significant change to former rules, individuals with enhanced protection and fixed protection registered before 15 March 2023 can now pay in new contributions to their pensions and retain their existing protected tax-free cash entitlement.
However, the maximum amount of tax-free cash those who hold enhanced protection can take will be restricted to the amount they could take on 5 April 2023.
Annual allowance
The annual allowance has proved particularly problematic in recent years and has often been cited as a main reason senior doctors consider early retirement.
By increasing the limit of yearly tax-free pensions savings by 50% to £60,000, the Chancellor has removed the problem for most clinicians for the time being.
In addition, the tapered annual allowance, which reduces the standard savings limit further on a sliding scale, will now revert to its previous minimum level of £10,000 from £4,000.
You will also be able to earn more before the tapered annual allowance applies. In April, the ‘adjusted income’ threshold rose from £240,000 to £260,000. This figure includes not only workplace earnings, dividends from investments and property income but also NHS pensions growth and any personal pensions.
With these changes in place, it may prove beneficial to consider whether potential tax benefits exist for restarting private pension contributions or buying additional pension.
The Spring Budget publication also confirmed that public sector pension schemes will be considered ‘linked’ for the purposes of annual allowance calculations. This effectively means that negative pension growth in the 1995 section can be offset against positive growth in the 2015 scheme.
NHS retirement
The outcome of the Department of Health and Social Care’s consultation into NHS retirement flexibilities, published in March, now offers further opportunities for those thinking about the future.
A new ‘retire and rejoin’ scheme has been active since April and means doctors can now retire, draw their NHS pension benefits and rejoin the 2015 scheme to accrue further benefits.
This strategy allows members of the 1995 section to enjoy the same facility as those in the 2008 section and 2015 scheme.
There is no set limit to the pension benefits which can be accrued, so long as the member is under 75. Previously, individuals returning were limited to 16 hours of work for the first month after ‘retirement’ but this condition has now been removed.
Partial retirement
In order to delay the full retirement of key staff and the loss of senior skills and experience, doctors will be able to access partial retirement from October 2023 while retaining their current job role, terms and conditions.
Individuals aged 55 and above, can choose to take up to 100% of their pension benefits, but must reduce their pensionable pay by at least 10% to qualify.
The Department of Health and Social Care has promised new guidance on how this might work in practice, but it is possible that an agreement could be forged between the employer and cons- ultant to make some programmed activities non-pensionable, for example.
Valuations and inflation
From now on, the date that the 2015 pension scheme is revalued each year will be 6 April rather than 1 April.
Each year, the 2015 pension is revalued to keep in line with the cost of living, using the Consumer Price Index rate from the previous year plus an additional 1.5%. The new date gives a fairer and more accurate view of pension growth.
McCloud Remedy
A further 12-week consultation was launched in March to discern how the Government plans to implement the McCloud Remedy from October this year.
To recap, this is the plan to alleviate the deemed age discrimination caused by moving some members to the 2015 scheme.
It has also been confirmed that doctors who moved their accrued 1995 section benefits into the 2008 section as part of the previous ‘Choice 2’ election will be offered the chance to change their decision as part of the McCloud Remedy.
This is because some members may have moved to the new section because of the lack of flexibility in the 1995 scheme at the time.
This does create an extra layer of complexity for calculations, even before we begin to unravel the figures generated for the seven years of the McCloud remedy period.
Seek expert advice
The recent Budget and NHS developments present opportunities, but as with all financial decisions, must be considered in relation to your particular situation and as part of your overall plan.
There can be hidden pitfalls to some of the new measures which could prove costly in the long run. Always seek expert help before making bold choices.
Dr Benjamin Holdsworth (right) is a director of Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS