No doubt you are aware that more proposed changes to pensions has been announced by the Government.
The good news is that the Coalition has attempted to simplify matters, which is very welcome after Labour’s legacy of the anti-forestalling legislation (how complicated does it need to be?).
Let’s take a look at the main changes that will affect doctors and dentists:
There’s a new annual allowance (AA) of £50,000 a year (reduced from £255,000), including all individual and employer contributions. This will be frozen at £50,000 until 2016/17. Prior to the announcement it was expected the allowance would be limited to £30-40,000 so this higher amount is welcome.
The anti-forestalling measures for higher earners will cease (cue round of applause…)
Tax relief will still be available at an individual’s marginal rate (for example, a 50% taxpayer will get a pension fund of £50,000 for a net cost of £25,000).
Any unused annual allowance in one tax year can be carried forward to the following three tax years. This is an unexpected bonus and will help smooth any spikes in accrual charges. Carry forward will be offset against any annual allowance tax charge, starting with the tax years 2008/09, 2009/10 and 2010/11 based on the assumed annual allowance of £50,000.
Where an individual’s pension savings exceed the Annual Allowance and a tax charge is due (at their marginal rate) they will be responsible for notifying HMRC via their self assessment tax return.
NHS Pension Scheme members will need to value the increase in their annual benefits by a factor of 16 (increased from the current 10). For example, if a 1995 GP/GDP scheme member has an average annual increase of £1,600 pa in pension benefits (which would be earned if the NHS pensionable income is £114,285 pa), this would amount to £13,200 pa Annual Allowance utilised. The member would have £36,800 allowance remaining. Note: this is an approximate estimate (the previous year’s pension income is increased by the Consumer Prices Index to arrive at the £13,200 sum).
It appears that the Annual Allowance of £50,000 has come at a cost with the reduction in the Lifetime Allowance from £1.8 million to £1.5 million from April 2012. The Government will be consulting on this change later this year with a view to offering some form of protection to those individuals that may lose out.
It is planned that this legislation for the above changes will be incorporated into the Finance Bill 2011. Of course, do remember that there may be amendments to the details of these changes.
The one change that stands out is the ability to use carry forward of unused relief for 3 years. This provides a great planning opportunity, assuming pensions are the most appropriate vehicle into which you should be investing.
See this article on Pensions vs ISAs.
So, whilst the Annual Allowance has suffered an 80% reduction, it may be possible to contribute up to £150,000 in a pension scheme, less the amount that is being invested in other pensions, including the NHS Pension.
Investing in pensions offers very attractive tax advantages, with up front tax relief at your marginal rate as well as tax efficient growth (for personal pension schemes).
It’s a relief to see the new Government sweep away some of the complexity that is prevalent in the current legislation, as this can only encourage individuals to take advantage of the benefits that pensions can potentially deliver.
This is a great opportunity to ascertain whether you could/should be investing in pensions. If you’ve been reading our prose for any length of time, you’ll know that we encourage all medics and dentists to take their overall position into consideration before making any important financial decisions.
Why not put this on your ‘to do’ list and aim to check your personal situation before the end of the year?