In light of recent changes
There have been a number of key changes to pensions that are valid from April 2016. They could affect your NHS pension, your private pensions and your tax arrangements. Subsequently, this could affect your retirement plans, so it is vital to properly plan when it comes to your pension. Here we layout the changes and the action we suggest doctors and dentists consider carefully.
Change 1: Reduction in the Lifetime Allowance
The Lifetime Allowance (LTA) is the amount of pension funds that can be accumulated free of tax charges over the course of your lifetime. From April 2016 this has reduced to £1 million, down from £1.25 million. This will most affect those contribution to substantial pension pots.
From April 2018, the Lifetime Allowance will be index linked, to the Consumer Price Index (CPI), so could float up or down.
Read more – Doctors and dentists face pension choices
Change 2: Introduction of more protection for the LTA
There are a number of protection policies that can be arranged for those who’s pension fund has exceeded £1 million at April 2016. Joining one of these would essentially mean savers can continue to build their pension fund to £1.25 million without triggering the tax charge.
There are Fixed Protection policies and Individual Protection policies and T&C’s apply in order for the policy to remain valid. For example, if you invest even £1 more than the new allowance, the protection policy is lost, so it requires careful monitoring.
Read more about possible ways to limit the tax charge
Change 3: Tapering the Annual Allowance
The Annual Allowance regarding pensions is the amount that can be accumulated free of tax charges over the course of a tax year.
The Annual Allowance is £40,000, however from April 2016 this will be tapered for those earning over £150,000 in adjusted income, which is calculated as all income plus the pension contributions in the year. For every £2 of earnings over £150,000, there will be a reduction in the Annual Allowance of £1, up to a minimum limit of £10,000 annual allowance, which will apply to those with adjusted earnings of £210,000 and above.
This could certainly affect high earning doctors and dentists and it will be useful for you to seek financial advise to maximise your pension position whilst factoring the tax implications.
Change 4: End of contracting-out for NHS pension
The new flat-rate State Pension has effectively abolished the State Second Pension and ended contracting-out, which allowed both employer and employee to pay reduced National Insurance contributions (NIC).
Members of the NHS pension scheme will have to pay full NIC’s, which equates to broadly 1.4% of salary.
Pension planning for doctors and dentists in 2016
In light of all these changes, there are a number of questions you will need to ask yourself to make accurate pension decisions this year.
- Will I breach the LTA? If so, when?
- What will the tax liability be if I exceed the LTA? Is it a price worth paying for the pension benefit?
- Could I invest the same money elsewhere for a better return for retirement?
- Should I consider drawing my pension early?
- Is the NHS pension still worthwhile for me, if applicable?
You will also need to factor in the following:
- Is your income anticipated to increase this year?
- Will your private practice income increase?
- What is the expected growth in your NHS pension or any private pensions?
- Will your Annual Allowance be tapered this year?
Working with a specialist financial adviser who understands pensions as well as the sometimes complex nature of the income of doctors and dentists, can certainly help.