When the government announced its ‘Pension Simplification’ programme for April 2006 and called it ‘A Day’, we planners looked forward to many improvements (and simplifications).
I suppose now nearly 3 years on we are not surprised to see that in some ways it has had the opposite effect. This is particularly true of something called the Lifetime Allowance (LTA).
This rule states that you are limited to how much pension benefits (from any source other than the state pension) you can have in your lifetime. The limit started at £1.5 million in April 2006, and is currently £1.65 million, rising to £1.8 million in 2010.
If you build up pension funds worth more than these figures, then you will be taxed on the excess at 55% on lump sums and 25% on a pension. It is important to remember that this tax would apply to the pension that (when taken) takes you over the limits.
Last summer, all doctors and dentists in the NHS Superannuation Scheme should have received a letter that discussed this very point. As a result, we have had many questions from clients on this subject, with some being worried as to whether this will mean they will lose out.
It is a complex issue for many, and here we try to cover the main issue – should you apply for pension protection before the deadline of 5th April 2009?
The first thing to mention is that this LTA rule affects those who are high earners in the NHS, and have or will have around 35 to 40 years service by retirement. By high earners we mean those earning approximately £140,000 per annum plus.
There are two types of Protection that the NHS offer, Primary and Enhanced. So what are these designed to achieve, and are they something that you should action?
Primary Protection – PP
This is available to Scheme members whose total benefits at A-Day (5th April 2006) were higher in value than the standard lifetime allowance of £1.5m.
It protects benefits by permitting an individual increase to the LTA, as calculated at April 2006. Further benefits can be accrued but a charge will be applied to any excess over the individual LTA protected benefits.
If you are unsure about whether you are eligible here, ensure you check this as soon as possible. This particularly applies to anyone who has a Merit Award, and/or other pensions.
Enhanced Protection – EP
Many of our clients of course, say in their 40s, were not exceeding the LTA limit as of April 2006. However, they may well exceed any new limits in the future.
So the idea of Enhanced Protection is to take these increases into account. However, there are limits on this option, and this is covered by rules called Relevant Benefit Accrual (RBA).
RBA is applied to those who have registered for Enhanced Protection to ensure that their benefits have not grown above prescribed limits set by HMRC. The limit has been set at the greater of 5% or the growth in the retail price index for each year after A-Day.
One of the key reasons for our hospital Consultant clients exceeding the LTA is the impact of Merit Awards. A senior Consultant with the accompanying seniority payments who gains a Gold or Platinum Award sees their pensionable income increase dramatically.
So from not having a problem one day, they may do the next!
Please note, if an individual applies for Enhanced Protection, they normally cannot pay further pension contributions.
However, this does not apply to the NHS Pension Scheme, but does apply to any other pensions.
If you are considering registering for enhanced protection and you are currently contributing to other pension arrangement(s) then you should contact the provider directly to establish if you can continue to pay pension contributions.
If you contribute to a scheme where further contributions are not allowed then you may not be able to apply for this protection, or you could lose enhanced protection.
Please note – if you have contributed to any form of private pension such as a personal pension, or additional voluntary contribution since 5th April 2006, then you are not eligible for Enhanced Protection. Added Years with in the NHS Pension Scheme are not affected and you can still apply.
Enhanced protection can also be lost if your total benefits, including added years contributions, grow too much. This is checked at retirement, looking at your benefits tested against Relevant Benefit Accrual.
In summary, enhanced protection removes the LTA charge completely but is subject to several important conditions:
- Benefits at retirement must be subject to a RBA test, and if this shows you fail the test, then all EP is lost
- Generally, members cannot continue to pay contributions to a defined contribution scheme, including money purchase additional voluntary contributions schemes. But they can keep contributing to the NHS Superannuation Scheme to build scheme membership
Recently the government announced that the LTA limits will be frozen from 2011! They will not increase before 2016, and perhaps not even then – can you trust the government?
This will have a dramatic effect for those with pension funds near the upper LTA figure, and many who thought that they had no problem as they were sufficiently below the LTA.
Registering For Protection
You have until 5 April 2009 to make your decision. You need to register your total pre A-Day benefits with HMRC. Further details can be found on the HMRC website
You can register with HMRC for both Primary and Enhanced Protection. NHS Pensions cannot apply on your behalf, so it’s down to you.
In order to register you will need to provide HMRC with a valuation of the capital value of your NHS Scheme benefits as at 5 April 2006 by 5 April 2009.
If you require a valuation of the capital value of your NHS Scheme benefits at 5 April 2006, you need to contact your local Pensions/Payroll Officer or PCT.
So what would we advise? Well, a few general points.
As readers of our newsletter have probably heard before, when we develop a retirement strategy with a client, they generally do not require more pensions. In fact we quite often stop non NHS existing pensions since the clients own cash flow model (Financial Sat Nav) shows that they do not require more income in retirement which will be heavily taxed anyway.
Another way of reducing or avoiding an LTA problem is to go part time at say age 55 or 60. This again is something we have seen increasingly being considered by clients. For example, by working 5 years at 3 days per week, it could reduce your NHS fund value by around £100k on a Whole Time Equivalent salary of £170k pa.
You could, however, take a fatalistic view. Chatting to one client who would be affected, he had the attitude of ‘so what’.
Basically he thought that as he was only going to be taxed on any excess pension, he was a very fortunate man to be receiving so much.
Not everyone may feel this way however!
Finally, as there is no downside to applying for PP or EP, we would advise you to do so. It is questionable whether EP will help in reality, but of course it may well do so in your case.
So go ahead and apply. The coming years will tell if this bit of extra paperwork will pay off.
Do not ignore this! Check your position to ensure you are doing all you can to maximise your pension position, yet avoid a tax hit.
Plan ahead, and ensure you have your own Financial Map/Sat Nav. If your adviser has not provided one, ask! Diagnosis before prescription.
Check if you are eligible for Primary Protection by checking your total pensions fund value as of 5th April 2006. This includes all Personal Pensions as well as the NHS Superannuation Pension. If the total is above £1.5 million, apply for Primary Protection and why not Enhanced Protection as well?
For everyone else, you may as well apply for Enhanced Protection. Get the paperwork out of the way now, way before the deadline.
Remember, the deadline is 5th April this year.