The Lifetime Allowance is the total amount of pension savings you can build up tax efficiently over your lifetime. On 6 April 2014 the Lifetime Allowance will be reduced from £1.5 million to £1.25 million. Many dentists could well exceed this due to the generous nature of the NHS Pension Scheme, especially those later in their career. A pension pot of £1.25 million translates roughly into an annual NHS pension income of between £54,300 and £65,500 depending on which section of the NHS pension scheme you are in.
Remember that the value of your pension savings for the Lifetime Allowance includes any private pensions or occupational pensions you may have, as well as your NHS pension.
You're encouraged to review your existing pension arrangements before the changes come into force in April 2014.
What will the impact of the changes be?
If your benefits at retirement exceed the Lifetime Allowance, you will incur a Lifetime Allowance tax charge on the excess amount. This will be 55% if the excess is taken as a lump sum and 25% if taken as an income.
How likely am I to exceed the Lifetime Allowance?
If you fall into one of the following groups, you may have already reached, or be close to reaching, a pension pot in excess of £1.25 million:
- you have accrued significant NHS pension benefits already during your career, this will be driven by both your years service as well as your revalued lifetime earnings
- you have made significant contributions over your working life to a private pension or have bought additional benefit through your NHS pension, for example through Added Years
Is there anything I can do to protect myself from the changes?
In his 2012 Autumn Statement the Chancellor, George Osborne, proposed two new types of protection – fixed protection 2014 and individual protection 2014 – both designed to ease the transition to the new lower limit and help protect existing pension savings.
Fixed protection 2014
- This will allow people to fix their Lifetime Allowance at £1.5 million
- The protection may be lost if individuals build up additional pension savings after 5 April 2014
- Fixed protection may also be lost if an individual starts contributing to a new pension arrangement
- Individuals need to apply for this protection before 6 April 2014. It is expected that the application form will be available later this year
- You will not be eligible to apply for this protection if you have Primary, Enhanced Protection or Fixed Protection 2012.
Individual protection 2014
This is under consultation until 2 September 2013, after which final details will be confirmed, but it is expected that:
- It will give individuals a personalised Lifetime Allowance based on the value of their pension savings on 5 April 2014 up to a maximum of £1.5 million
- Individuals will need to have pension savings of at least £1.25 million on 5 April 2014 to apply
- Protection will not be lost if further savings to pensions are made
- You will have three years to apply for individual protection 2014 from 6 April 2014
- You will not be eligible to apply for this protection if you have Primary or Enhanced Protection
Should I opt out of the NHS Pension Scheme in order to register for fixed protection?
For the vast majority of active members this would be unwise, as the benefits lost by voluntarily opting out of the NHS Pension Scheme before retirement would be far greater than any advantage gained by having a higher lifetime allowance. However, for a small number of members, such as those already very close to retirement, there may be some merit in exploring this option further.
Decisions about leaving your pension scheme prematurely should be taken extremely carefully. Whist minimising your tax liabilities is definitely one consideration, it shouldn’t be the only one.
This is a complex area and one which isn’t easily navigated. Only by understanding all of your options and your current pension position will you be able to make an informed decision. It’s important to remember that there is no ‘one size fits all’ approach when it comes to fixed protection and that no ‘rule of thumb applies’. You should seek guidance from a financial adviser who has a good understanding of the NHS Pension Scheme.
Contact your local Financial Consultant
If you would like to find out more about how these changes may impact you, request a no-obligation appointment with one of our Financial Consultants:
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