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Don't fall foul of new pension rules

In April the Chancellor of the Exchequer plans to introduce changes to pension regulations ­ Dr John Couch explains the implications for GPs

In April the Chancellor of the Exchequer plans to introduce changes to pension regulations ­ Dr John Couch explains the implications for GPs

On 5 April the Chancellor is introducing pension rules called the 'A-Day regulations'. The aims are to simplify the pension tax regime and also encourage greater pension investment.

The news is mostly good, with greater scope for pension contributions in terms of both quantity and variation. But GPs at the higher end of the NHS income scale have only a few weeks left to ensure they fall within the new limits or apply for transitional protection if needed. At the very least, all GPs should take this opportunity to review their pension plans now.

The new limits

From 5 April a new 'lifetime allowance' (LTA), starting at £1.5 million, will be introduced. The means the size of a pension fund for 2006/7 must fall below this limit or face punitive tax of 55 per cent on the excess. This limit will rise in stages to £1.8 million by 2010/1.

While these figures sound large, in actual fact some GPs, perhaps the top 5 per cent of earners, could breach the limit, especially given the actual and forecast increases in NHS pension dynamising factors from 2003/6.

For occupational pensions such as the NHS scheme, the size of fund will be reached by multiplying the annual pension by a factor of 20, adding the lump sum and then the value of any other pensions. Many GPs have invested some of their private income in money purchase pension schemes. These will be added to the calculation. Two groups of GPs could be caught out:

  • GPs who have always had high list sizes and therefore high NHS superannuable incomes. A GP with a predicted annual NHS pension of £66,000 and a lump sum of £198,000 would have an LTA of £1.518 million. The value of any money purchase schemes would be added to this figure. The £1.5 million LTA would be exceeded, resulting in a hefty tax bill.
  • GPs with average NHS earnings but high private earnings where full private pension contributions have been paid on the latter. So a GP with a predicted annual NHS pension of £53,000 and lump sum of £159,000 would have an LTA of £1.219 million. If he also had a total private pension pot of £300,000 then once again the LTA would be exceeded (total = £1.519 million).

Therefore all full-time GPs who have average or above-average NHS earnings, no breaks in service and some private pension schemes should be taking independent advice to decide if action needs to be taken to avoid punitive tax 'recovery charges'.Consideration also needs to be given to the potential for growth in private pension funds.

The LTA will rise by around 5 per cent p.a. over the four years from 2006. There is no guarantee after this. Once a fund is projected to get close to the limit by retirement there is little point making further contributions.

Other investments, or a greater focus on the pensions of your spouse, will then be in order.As a concession to anyone who is nearer retirement and already has a large pension pot, transitional protection is offered.

Those lucky enough to be in this position can protect their pension against the restrictions of the LTA by applying for either 'primary' or 'enhanced' protection. Although registration for either of these must be by 5 April 2009, the latter involves stopping pension contributions after 5 April 2006 so expert advice before then is essential.

Are younger GPs affected?

Young high earners could be affected in their turn, especially if the LTA does not rise as high as average pension growth.

We have all seen the effects of 'fiscal drag' on inheritance tax, property stamp duty and the 40 per cent higher tax band. Increases in allowances have been deliberately kept below earnings and property prices, thus increasing tax returns for the Treasury. I would not take any bets that this could never happen to pension funds! As discussed above, regular pension monitoring will remain a vital discipline.

Good news

The A-Day changes do contain some good news. Up to 100 per cent of salary can be invested per annum in a pension scheme with the usual tax relief (subject to a maximum of £215,000 for 2006/7). Previous limits were much lower. But quite how one lives if 100 per cent of one's salary is paid towards a pension is entirely another matter!

This gives the opportunity to boost pension pots much faster, which is particularly useful for part-time GPs, those with breaks in service and those near retirement with unhealthy-looking pension forecasts.

Occupational schemes such as the NHS scheme have the final say in this so it is likely that GPs wishing to invest larger amounts will need to do so via private pensions. The ability to take a maximum 25 per cent cash-free lump sum (with a reduced pension) will be extended to more schemes. This should include AVCs, which were previously excluded. Many GPs have AVCs and will benefit from this extra option as most will pay tax at 40 per cent on a large chunk of pension income but no tax on a lump sum.

There will be a wider variety of investment types for private pension schemes and SIPPS, although any GPs who were considering fine wines or a property in France for investment will now have to reconsider after the recent backtracking by the Chancellor.

The obligation to buy an annuity with private pension funds from age 75 will be removed. There will be a number of other options available.

It may be possible to include relatives other than spouses/partners, thus opening the door, after death, for any remaining funds to be passed on to another generation (subject to inheritance tax of course). Currently money in an annuity is lost at death. Full details of this are still under negotiation.

Finally the new rules apply to all so there is also scope (up to 100 per cent of salary) for a working spouse/partner to invest in a personal pension. GPs near the LTA could consider this option. For non-earning spouses the limit remains at £3,600 per annum.

John Couch is a GP in Ashford, Middlesex

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