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Reduced Pension Allowances – Guide for Doctors
Exeter 7 March 2013Torquay 12 March 2013Plymouth 13 March 2013Truro 9 April 2013
Luke Bennett
www.francisclark.co.uk
Introduction
Luke Bennett – Truro office
Stuart Cowen – Plymouth office
Sharon Austen – Exeter office
www.francisclark.co.uk
NHS Pension Scheme – Impact of Changes
• 1995 v 2008 sections
• Annual allowance
• Lifetime allowance
• Increasing contribution rates
• Hutton report
• National Employment Savings Trust
www.francisclark.co.uk
www.francisclark.co.uk
NHS Pension Choice
1995 Section 2008 Section
Normal retirement age 60 65Benefits 1.4% earnings plus
lump sum1.87% earnings minus lump sum
Survivor pension 50% 37.5%
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NHS Pension Choice
1995 Section 2008 Section
Lump sum Normally 3 x pension
Minimum 4.2% of earnings up to
31/03/2008Maximum 5.36 x
pensionMaximum 4.28 x
pensionAdded years contributions
Continue Cease but benefit to date transferred
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Restriction of Tax Relief – Annual Allowance
• £50,000 maximum
• Reducing to £40,000 from 2014/15
• Special rules for defined benefit schemes
• Measured against growth in benefits
• 16 x growth in pension + growth in lump sum
www.francisclark.co.uk
Restriction of Tax Relief – Annual Allowance
Example for consultants (member of 1995 Section)Salary at 31 March 2011 £110,000Years of service 34Pension rights at 31 March 2011
£110,000 x 34 / 80 £46,750
Increase by CPI (September 2010) 3.1% £48,200
Annual pension input (growth in benefits)
www.francisclark.co.uk
Restriction of Tax Relief – Annual Allowance
Example for consultants (member of 1995 Section)Salary at 31 March 2012 £118,000Years of service 35Pension rights at 31 March 2012 £118,000 x 35 / 80
£51,625
Pension rights at 31 March 2011 £48,200Growth in pension in year £3,425Growth in lump sum in year (3 x pension) £10,275Annual pension input = 16 x pension growth + lump sum growth
16 x £3,425 + £10,275 £65,075Excess over annual allowance taxed at marginal rate
£15,075 x 40%? £6,030
Annual pension input (growth in benefits)
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Restriction of Tax Relief – Annual Allowance
Likelihood of being affected when annual allowance £50,000
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Restriction of Tax Relief – Annual Allowance
Simplified example for GP (member of 1995 Section)Career earnings at 31 March 2011 £2,000,000“Regulation 72 fraction”
Years in NHS pension scheme 20 1.250Years as a GP 16
Pension = 1.4% of career earnings x Reg 72 fraction1.4% x £2,000,000 x 1.250 £35,000
Increase by CPI (September 2010) 3.1% £36,085
Establish position at 31 March 2011
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Restriction of Tax Relief – Annual Allowance
Simplified example for GP (member of 1995 Section)Career earnings at 31 March 2011 £2,000,000Dynamisation factor for 2012 (CPI to Sep 11: 5.2% + 1.5%)
6.7% £134,000
Pensionable earnings in 2011/12 £110,000Career earnings at 31 March 2012 £2,244,000“Regulation 72 fraction”
Years in NHS pension scheme 21 1.235Years as a GP 17
Pension = 1.4% of career earnings x Reg 72 fraction1.4% x £2,244,000 x 1.235 £38,808
Establish position at 31 March 2012
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Restriction of Tax Relief – Annual Allowance
Simplified example for GP (member of 1995 Section)Value of pension at 31 March 2012 £38,808Value of pension at 31 March 2011 (after allowance for inflation)
£36,085
Growth in pension in year £2,723Growth in lump sum in year (3 x pension) £8,169Annual pension input = 16 x pension growth + lump sum growth
16 x £2,723 + £8,169 £51,737Excess over annual allowance taxed at marginal rate
£1,737 x 40%? £695
Annual pension input (growth in benefits)
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Restriction of Tax Relief – Annual Allowance
• Unused relief from previous three years can be carried forward
• Added years contracts complicate calculations and increase pension growth
• Private pension contributions to be factored in
• NHS Pensions required to calculate figures for 2011/12 and 2012/13 by October 2013
• Self assessment tax return for 2011/12 was due January 2013!
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Restriction of tax relief – Lifetime allowance
• Lifetime pension savings limit reduced from £1.8 million to £1.5 million on 6 April 2012
• Further reduction to £1.25 million planned for 6 April 2014
• Calculation based on 20 x pension + lump sum (+ value of any private pension funds)
www.francisclark.co.uk
Restriction of tax relief – Lifetime allowanceExample for member of 1995 Section £Career earnings at retirement
£4.7 million
Pension: 1.4% of career earnings
£65,800
Multiply by factor of 20 1,316,000Lump sum (3 x pension)
197,400
Value of pension 1,513,400For retirement between 6 April 2012 and 5 April 2014 charge on excess over £1.5 million
£13,400 x 25% £3,350 Pension reduced by 1/20th of lifetime allowance charge
Pension therefore reduced from £65,800 to £65,632
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Restriction of tax relief
Benefit of extra year’s membership If neither allowance exceeded
£
Pensionable pay 100,000
Employer’s and employee’s contributions 27,500
Tax relief (40%) (11,000)
Increased lump sum (4,200)
Net cost 12,300
Annual pension 1,400
Lifetime allowance charge -
Tax (40%) (560)
Net benefit 840
Effective annuity rate 6.83%
www.francisclark.co.uk
Restriction of tax relief – Lifetime allowance
Benefit of extra year’s membership If neither allowance exceeded
If lifetime allowance exceeded
£ £
Pensionable pay 100,000 100,000
Employer’s and employee’s contributions 27,500 27,500
Tax relief (40%) (11,000) (11,000)
Increased lump sum (4,200) (4,200)
Net cost 12,300 12,300
Annual pension 1,400 1,400
Lifetime allowance charge - (403)
Tax (40%) (560) (399)
Net benefit 840 598
Effective annuity rate 6.83% 4.86%
www.francisclark.co.uk
Restriction of tax relief – Lifetime allowance
Benefit of extra year’s membership If lifetime allowance
not exceeded
If lifetime allowance exceeded
If lifetime and annual allowance exceeded
£ £ £
Pensionable pay 100,000 100,000 100,000
Employer’s and employee’s contributions 27,500 27,500 27,500
Tax relief (40%) (11,000) (11,000) (11,000)
Annual allowance charge - say 5,000
Increased lump sum (4,200) (4,200) (4,200)
Net cost 12,300 12,300 17,300
Annual pension 1,400 1,400 1,400
Lifetime allowance charge - (403) (403)
Tax (40%) (560) (399) (399)
Net benefit 840 598 598
Effective annuity rate 6.83% 4.86% 3.46%
Comparable open market annuity rate
is 2.5% !
www.francisclark.co.uk
Restriction of tax relief – Lifetime allowance Transitional Protection
• Option to elect for fixed protection
Maintains lifetime allowance at £1.5 million
No contributions after 5 April 2014
Election must be made by 5 April 2014
• Option to elect for personalised protection
Available if pension rights exceed £1.25 million at 5 April 2014
Maintains lifetime allowance at 5 April 2014 value (max. £1.5 million)
Can continue making contributions
www.francisclark.co.uk
Increasing employee contribution rates
2011/12 2012/13 2013/14 2014/15 (possible)
Up to £15k 5.0% 5.0% 5.0% 5.0%
£15k to £21k 6.5% 5.0% 5.3% 5.3%
£21k to £27k 6.5% 6.5% 6.8% 6.8%
£27k to £49k 6.5% 8.0% 9.0% 9.75%
£49k to £70k 6.5% 8.9% 11.3% 12.5%
£70k to £110k 7.5% 9.9% 12.3% 13.5%
£110k and over 8.5% 10.9% 13.3% 14.5%
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Reduced monthly drawings fromApril 2013?
Pensionable profit Before tax After tax
£60,000 £120 £72
£80,000 £160 £96
£100,000 £200 £120
£120,000 £240 £144
£140,000 £280 £168
www.francisclark.co.uk
Hutton Report
• Link normal pension age to state pension age
• Final salary schemes replaced by career average earnings schemes
• Implement changes by 2015
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Government offer
• New scheme from 1 April 2015
• Those within 10 years of retirement at 1 April 2012 stay in existing scheme
• Date of joining new scheme delayed for those between 10 and 13.5 years of retirement at 1 April 2012
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Protection
Age at 1 April 2012 (if member of 1995
scheme)
Switch to new scheme
<46.5 1 April 2015
47 1 April 2016
47.5 1 April 2017
48 1 April 2018
48.5 1 April 2019
49 1 April 2020
49.5 1 April 2021
50 N/A
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New NHS Pension Scheme
• Career earnings for all members (GPs already on career earnings)
• Dynamisation continues at inflation + 1.5%
• Accrual rate 1/54th = 1.85185%
• Normal pension age linked to state pension age
• State pension age = 67 or 68?
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Protection for accrued benefits
45 46 47 48 49 50 82%84%86%88%90%92%94%96%98%
100%
Value of new scheme compared with 1995 Section
Age at 1 April 2012
Assumes member joined scheme at 25 and retires at 60
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Accountancy/Tax advice IFA advice
Annual allowance calculation Stop paying into NHS Scheme?
Lifetime allowance calculation Take early retirement?
Prediction of NHS pension Elect for fixed protection?
www.francisclark.co.uk
National Employment Savings Trust
• All employers compelled to offer either a Qualifying Workplace Pension Scheme (e.g. NHS) or NEST
• Will affect non-NHS employing bodies
• Employer contribution 3% to 4%
• Employee contribution 3% to 4%
• Opt-out option for employee
• Phased introduction up to 2017
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NHS Pension(average earnings £100,000 per annum)
Lifetime contributions
Retirement age
Pension Lump sum
£ £ £
1995 Section 752,500 60 45,573 188,125
2008 Section 860,000 65 56,883 215,000
New scheme? 1,182,500 68 54,995 295,625
www.francisclark.co.uk
NHS Pension Personal Pension(average earnings £100,000 per annum)
Lifetime contributions
Retirement age
Pension Lump sum
£ £ £
1995 Section 752,500 60 45,573 188,125
14,742
2008 Section 860,000 65 56,883 215,000
20,711
New scheme? 1,182,500 68 54,995 295,625
32,086
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Disclaimer & copyright
Luke Bennett - [email protected]
01872 276477
Stuart Cowen - [email protected]
01752 301010
Sharon Austen - [email protected]
01392 667000