The recent reduction of the Lifetime Allowance (LTA) is likely to affect many doctors and dentists in retirement, simply due to the size of the pension funds healthcare professionals tend to build. It affects both NHS and private pensions so it’s worth understanding your position and how you can avoid unnecessary tax charges.
What is the Lifetime Allowance?
If you are unsure of the term “Lifetime Allowance” (LTA) this refers to the maximum value that a pension pot can grow to, within a person’s lifetime, without it being subject to tax when it comes to drawdown.
The LTA has been reducing for some time now – reduced from £1.5 million to £1.25 million, which is the limit as it stands today, and it has since been announced in the 2015 Budget that from April 2016, the LTA would be reduced further to just £1 million.
What does it mean for dentists and doctors?
Broadly speaking, it means that those retiring on or after April 2016, who have established an NHS pension pot in excess of around £43,000 per annum, could be liable to pay tax.
The existing allowance accounts for an NHS pension pot of £54,000 per annum before this tax charge is triggered, as per figures published by the NHS.
Many doctors and dentists are in the fortunate position to have excess income to build both a personal and NHS pension reserve so falling subject to tax could be a very real problem they have to face.
Protect your existing allowance
The government will introduce Protection schemes for pension holders with a certain level of funds already so that they don’t effectively lose out altogether during this transitional period.
It is likely though that these schemes will only benefit pension savers who have funds in excess of £1 million at April 2016.
For personal pension holders the schemes are expected to be broadly the same as in previous years where the LTA has been reduced.
For the NHS pension, it could get more complicated though as many doctors and dentists are still unaware of how the LTA will be tested against their pension fund. With the new 2015 NHS pension being viewed as a completely new pension scheme, existing Protection covers will be lost when joining or moving to the new pension – something to get advice on!
Possible ways to limit taxable charges
There could be a number of ways to limit taxable charges but it is suggested to seek advice from a specialist financial adviser who understands the NHS pension system as well as pension regulations.
- Draw your NHS pension before April 16 – as the new LTA only comes into force from next April, pension contributions drawn in advance of that date are under the existing LTA of £1.25 million. Just be careful though as an actuarial reduction may apply if under the regular retirement age, usually 60.
- Apply for a Protection scheme – an option, although investing further into the pension may be restricted.
- Hold on taking any pension benefits – you will only be tested against your LTA when you start to drawdown. An automatic test will occur at aged 75 but there is some scope to hold fire and see if the LTA value changes in future years.
- Transfer some of the pension fund to your spouse – where the spouse has an active part in the practice, an employer pension contribution could be made.
Careful retirement planning
The LTA is expected to rise each year with inflation. However, this may not make much difference in the short term with inflation at a record low.
The key point is that the changes to the LTA require more careful attention to ensure retirement planning is robust.
Many doctors and dentists will take advantage of the new Flexible Pension rules and withdraw some of their pension fund at age 55, perhaps choosing to reinvest their money in another retirement vehicle.