Q&A: Understanding the annual allowance pension savings statement
A number of GPs will recently have received an Annual Allowance Pension Savings Statement for the 2011/12 tax year, prompting numerous questions from GPs. Are you still confused? Read healthcare accountant Luke Bennett’s helpful Q&A.
Why have I received this statement?
This could be because the NHS Pension Scheme has calculated that the growth in your scheme benefits exceeds the annual allowance of £50,000 for 2011/12 but could also simply be because you or an authorised third party (eg your accountant/tax adviser) has requested one.
What is the Annual Allowance?
HM Revenue and Customs introduced for the 2011/12 tax year an upper limit on pensions investment. For members of the NHS Pension Scheme and other similar schemes the Annual Allowance ‘AA’ is based not on the contributions you made, but on the growth in your fund benefits.
How is the growth in benefits measured?
This is particularly - uniquely - complex for GPs, so much so that the NHS Pensions agency was given additional time to calculate the growth. It measures scheme values at the start and end of the year and applies an actuarial factor to measure what that will mean over the lifetime of your scheme benefits.
Why is the statement for 2011/12 only available now?
Unfortunately because of the complexity and the additional time needed by NHS Pensions it has taken until now for the agency to be able to calculate the benefits.
What does the statement show?
The main figure shown is the growth in NHS Scheme benefits over the relevant ‘pension input period’ (1 April 2011 to 31 March 2012 for 2011/12). The statement also shows, where available, the growth figures for the previous three input periods. This is because, whilst the AA limit was introduced for the 2011/12 tax year, it is possible to utilise any unused allowance from the previous three years.
If my 2011/12 NHS Pension benefits grew by more than £50,000 will I need to pay more tax?
Not necessarily. As mentioned above, you may have unused annual allowances for earlier years that will cover (or at least reduce) the 2011/12 amount subject to a tax charge.
If my 2011/12 growth in NHS Pension benefits is less than £50,000 will I escape a tax charge?
Again, not necessarily. If you have other pension schemes into which inputs are made in the same tax year (whether these are defined contribution or defined benefit schemes) those inputs need to be added to the NHS Scheme inputs to determine whether the annual allowance has been exceeded – again, by reviewing 2011/12 and the three preceding years.
Why do the pension input figures seem to bear little relation to contributions actually made in each year?
This is because, for defined benefit schemes, the input figure reflects the growth in scheme benefits during the year – not the contributions actually paid in the year. The input figure for 2011/12 is an expression of the growth in benefits when comparing the position as at 31 March 2012 with the position on 31 March 2011.
Looking at the four years for which figures are shown, why do the growth figures vary so much? Why is 2009/10 much lower than the other years?
The calculated growth in benefits is based on your NHS pensionable pay in each year, which of course may have fluctuated, plus the annual dynamisation of career earnings. However, the annual allowance charge is designed to measure the real growth in benefits after taking account of inflation. To allow for this the opening value is uplifted by inflation as measured by the Consumer Price Index (CPI) for the September preceding the start of the tax year. The higher the inflation rate, the lower the annual allowance charge.
The CPI for the relevant periods have been: September 2007 used for 2008/09 1.8%; September 2008 used for 2009/10 5.2%; September 2009 used for 2010/11 1.1%; September 2010 used for 2011/12 3.1%;
The NHS scheme, however, applies dynamisation based on CPI (previously RPI) for the September ending in the year plus 1.5%. The dynamisation rates for the relevant periods have been: 2008/09 (Sep 2008 RPI + 1.5%) 6.5%; 2009/10 (Sep 2009 RPI + 1.5%) 1.5%; 2010/11 (Sep 2010 CPI + 1.5%) 4.6%; 2011/12 (Sep 2011 CPI + 1.5%) 6.7%.
Thus in 2009/10 the opening value was uplifted by 5.2%, even though the dynamisation applied in that year was only 1.5%.
How will I know how much extra tax to pay?
If the 2011/12 growth shown for you (for the NHS scheme plus any others you hold) is less than £50,000, there is no extra tax to pay. If the 2011/12 growth exceeds £50,000, you need to consider whether there are any unutilised AAs you can bring forward for relief. The easiest way to do this in the HMRC’s ready reckoner at: http://www.hmrc.gov.uk/pensionschemes/calc-aa.htm
If, after taking any unused relief brought forward into account, there is a sum liable to tax, the amount of tax payable will depend on your marginal tax rate in that year. Generally, because of the linkages between GPs earnings and pensions, if a GP has breached the 2011/12 AA limit, the chances are he/she will pay tax at between 40% and 50%.
Can I avoid paying this tax charge once it is established?
No, but, if the tax charge exceeds £2,000, there is the option of electing for the charge to be paid out of your pension fund by submitting a “Scheme Pays Election Notice” (form SPE 2). For 2011/12 this election must be received by the scheme administrators by 31 December 2013. The deadline will be 31 July 2014 for 2012/13, 31 July 2015 for 2013/14 and so on. If you make a “Scheme Pays Election” then the value of your pension benefits will be reduced, so independent financial advice is recommended.
Will the AA remain at £50,000 per annum?
No. Although the ceiling has been fixed at £50,000 for 2011/12, 2012/13 and 2013/14, it is dropping to £40,000 with effect from 6 April 2014.
How do I predict future pension input amounts so that I can control (or at least predict) the extent of future AA tax charges?
This is impossible to do without detailed calculations, and the calculations need to make assumptions about CPI growth and your projected earnings. In order to make full predictions, up to date information on career NHS earnings/service (not just the “normal” projections you may receive - these are not sufficiently detailed) would need to be obtained from the NHSPA.
As very simple guide, if your earnings have been and will be relatively stable, and you have not exceeded £40,000 pension input on average over the four years shown on the current statement, you are unlikely to breach the AA in the near future by a very significant amount. However, this is extremely simplified, since there are many factors that interact and if you are concerned that you may exceed the limit we recommend you take specialist advice.
If it looks like I may regularly exceed the AA and so incur additional tax should I exit the NHS Scheme?
Not necessarily! Despite recent changes, the NHS Pension Scheme provides benefits that would be difficult to match elsewhere. It will only be scheme members with very specific scenarios in relation to Annual Allowance charges and/or Lifetime Allowance charges who would be advised to exit. Expert advice should always be sought before taking such a step.
What is the Lifetime Allowance you mention above?
This is also a pension benefit limit, but as the names suggest, the AA looks at your pension growth on an annual basis; the LTA looks at your accumulated benefits to date. The LTA is set to drop from 6 April 2014 and GPs need to look at their options now. If you have not received our separate briefing note on this, please contact us.
Accountant Luke Bennett is an accountant at Francis Clark, based in Cornwall. He specialises in advising the healthcare sector, including GP partnership.