Increasingly complex, pensions for dentists require specialist expertise
No matter how far away (or close) to retirement, it’s important to be aware of how rules and how they could impact on you. There are two key areas to consider:-
Restrictions on how much can be paid into pensions came in from 6th April 2016. From this date, the Annual Allowance (AA) could be less than £40,000 pa.
Normally the AA is up to £40,000, in other words the amount that can be paid into pensions each year without you suffering a tax charge, However for High Earners, the limit of £40,000 is “Tapered” from 6th April 2016 – the actual AA available will depend on the level of total income and value of employer pension contributions.
The rules are very complex (when are they not!) and will depend on each individual’s circumstances. Very broadly, Tapering of the AA is likely to apply if TOTAL income exceeds Threshold Income of £110,000.
The definition of “Threshold Income” broadly includes:
- Salary, dividends, pensions already in payment including State Pension, rental income, trading income, savings income and benefits in kind, though certain reliefs are available.
- If Threshold income exceeds £110,000 (even by 1p), a further calculation is required to calculate “Adjusted Income”.
The definition of “Adjusted Income” broadly includes:
- Salary, dividends, pensions already in payment including State Pension, rental income, trading income, savings income and benefits in kind, AND THE VALUE OF EMPLOYER PENSION CONTRIBUTIONS, again certain reliefs are available.
If Adjusted Income exceeds £150,000, the AA is Tapered by £1 for each £2 of Adjusted Income over £150,000.
- Individuals with Adjusted Income of £210,000 or above will have a minimum Annual Allowance of £10,000*.
- There’s a tax penalty for exceeding the Tapered Annual Allowance, you might have to pay this yourself and details must also be disclosed in self-assessment returns.*It might be possible to have a higher AA if the maximum AA wasn’t fully utilised in previous years.
Clearly, it’s very difficult for individuals to work out firstly if they’re caught by these rules, in many cases the position simply won’t be clear until after the end of the tax year. Secondly, individuals will need to keep detailed records of income, thirdly it’s mandatory to declare if the AA or Tapered AA has been exceeded in the self-assessment return. The NHS automatically provides a Pension Savings Statement, but only to members exceeding the AA of £40,000. The NHS can’t determine if members are subject to the Tapered AA – this is the individual’s responsibility.
We recommend checking net pensionable earnings (NPE) or net pensionable earnings equivalent (NPEE) is correct on each NHS Dental Services contract for the period from 1st April 2016 to 31 March 2017 before the deadline on 30th June 2017. These figures form the basis for calculating pensionable benefits and in turn the amount of AA used up. Its the value of benefits, rather than the total contributions paid to the NHS scheme, that are assessed against the AA for 2016/17.
How much can build up in a pension is capped at £1m from 6th April 2016? The cap is called the Lifetime Allowance or LTA.
Individuals might be entitled to a higher LTA but only if they had (and continued to be eligible) for Transitional Protection when benefits are drawn. Due to the complexities of the rules, and for the sake of brevity, Transitional Protections isn’t covered by this article.
The LTA dropped from £1.25m to £1m on 6th April 2016, but it will be increased in line with CPI from April 2018. It applies to ALL pension benefits except State Pensions. This means it applies to NHS pensions and lump sums, plus other pensions including private pensions.
Those with periods of long membership and high earnings and/or other pensions are at most risk of exceeding the LTA.
The first step is to calculate the value of pensions, the calculation is broadly as follows:
Value for LTA = (NHS Pension or final salary pension x 20) + lump sum (e.g. from NHS 1995 Section ) + value of any other money purchase pensions.
If this total is more than £1m, there will be tax charge on the excess over £1m. The tax charge on the excess is 55% if the excess is taken as a lump sum or 25% if the excess is used to provide an income, however further income tax is levied on the income taken at highest marginal rates. The LTA tax charge on NHS pensions can be met by opting to take a lower NHS pension – this is a permanent actuarial reduction to pension once in payment.
By careful planning, it might be possible to reduce or negate the impact of the LTA tax charge. If you think you may be affected by the Tapered Annual Allowance or reduced Lifetime Allowance, get in touch with Claire Musson. Claire has considerable experience of the NHS Pension scheme and on pensions for dentists. She can provide independent financial advice, assess and quantify the extent of any potential tax liability, assess whether you have unused annual allowances from previous tax years and also comment on the benefits of remaining in the NHS Pension Scheme and calculate the tax position for exceeding the LTA. Claire generally provides a free initial consultation session to discuss your specific