Pension tax relief reforms: will this affect GP’s?

Pension legislation introduced from the 6 April 2011 may have an impact on your GP NHS pension that you may not be aware of.

The key changes are:

• Maximum tax allowable pension contribution reduces from £255,000 to £50,000
• A new carry forward facility of up to 3 years worth of unused annual allowance
• The Lifetime Allowance (LTA) reduces from £1.8million to £1.5million from 6 April 2012
• Transitional protection for those with fund values close to the LTA
• Individuals who claimed Enhanced and Primary Protection before 6 April 2009 is maintained

How therefore is a GP’s annual increase in pension benefit going to be valued? To put a value on a GP’s NHS pension scheme “pension pot” requires a special calculation to assess the deemed value of the employee and employer contributions.

Annual Allowance Example

Colin is a 55 year old GP with superannuable earnings in 2010/11 of £110,000 and dynamised career earnings of £3,000,000. In the tax year 2011/12, Colin’s earnings are £115,000 which will increase his career earnings to £3,115,000 (excluding dynamisation).

Step 1 – The value of Colin’s annual pension at the end of 2010/11 is £42,000 (1.4% of £3,000,000) plus a lump sum of £126,000 (3 x £42,000).

Step 2 – Match this against Colin’s annual pension in 2011/12 of £43,600 (1.4% of £3,115,000). This will increase further to £44,254 when the 1.5% up-rating factor is added in and the lump sum of £132,762 (3 x £44,254) is included.

Step 3 – The increase in the value of the pension scheme and lump sum is based on a pension increase year on year of £2,254 multiplied by a factor of 16, plus the increase in the lump sum of £6,762, which equals £42,826.

Colin is below the annual allowance of £50,000 and no tax charge is due.

Any GPs with higher dynamised earnings and annual earnings could be caught by this tax charge should the notional value of the increase be higher than the £50,0000 annual allowance, resulting in a tax charge at their highest marginal rate (possibly 50%).

Lifetime Allowance Charge Example

The reduction of the Lifetime Allowance (LTA) on the 6 April 2012 from £1.8m to £1.5m also means GPs need to be aware of how this may impact their pension. A GP’s pension is valued by using a factor of 20 times the current annual pension plus any lump sum. So a GP with a pension of £75,000 plus a lump sum of £225,000 gives a notional value of £1,725,000.

This figure is below the 2011/12 LTA limit, but from 6 April 2012 this GP would exceed the LTA.

Example

The LTA charge is recovered by reducing the annual pension by the amount of the LTA charge divided by a standard factor of 20, (£56,250/20) £2,812.50 per annum.

The LTAC above represents a recovery against pension. If this is not viable there could be a higher LTAC of 55% applied against the lump sum.

It is possible to apply for transitional protection known as “Fixed Protection” which will allow a GP to maintain their own personal LTA at the current level of £1.8m and must be applied for before 5 April 2012. The main disadvantage of Fixed Protection is that no further contributions are allowed (apart from annual increases due to indexation). This means a GP would need to cease all contributions to all pension schemes.

GPs need to take care that any increase in their annual pension benefit and lump sum does not breach the £50,000 annual allowance and incur the tax charge. The changes in the LTA may be a concern for GPs in their 40s and 50s. Given the complexities of the new rules it is essential that GPs seek independent advice to review their position and take any necessary action to try and avoid excess tax charges if appropriate.

Contact - Graham Burnett, Chartered Financial Planner, Director of Johnston Carmichael Financial Services Ltd. Graham can be contacted on 01224 259373 or email graham.burnett@jcifa.co.uk.