How do new rules affect your
Now that A-Day pension changes have come into force, GPs need to know what strategies to adopt to plan for retirement and beyond Dr John Couch offers
The A-Day pension changes came into effect at the beginning of this month. This is how they may apply to GPs.
The new lifetime allowance
There is now a lifetime allowance (LTA) consisting of the total value of all your individual pension funds/schemes. The LTA is £1.5 million for 2006/7 rising to £1.8 million by 2010/1. It is hoped the limit will then rise by at least the level of inflation, although this has not yet been confirmed.
To calculate your LTA you must add together the following:
·your forecast NHS pension at preferred
retirement age multiplied by 20; you must include any added years
·your NHS lump sum at preferred
retirement age (forecast pension x 3)
·the predicted value of all other pensions at preferred retirement age; you must
include lump sums.
The latter figure is difficult to predict as it will depend on investment returns. But assume a growth rate of 6 per cent for now. While most GPs will stay safely within the limit, a minority, perhaps 5-10 per cent, may exceed the LTA and face a punitive 55 per cent tax.
Review your total projected pension value annually. Anyone whose forecast approaches the limit should consider diverting money earmarked for non-NHS pension plans into non-pension investments. It may even be necessary to suspend NHS pension payments.
An annual pension review is also excellent discipline for all GPs, to ensure that retirement planning remains on track. You can obtain an up-to-date NHS pension forecast from the NHS pension agency.
New pension lump sum rules
Prior to A-Day it was not possible to receive a lump sum from an AVC or FSAVC pension. This has now changed and you will be able to take up to 25 per cent as a lump sum. The lump sum payable on receipt of your NHS pension continues, as does the ability to take up to 25 per cent cash lump sum from all personal pension funds.
If you have any form of AVC, factor in this change to your retirement plans. For most GPs the size of the lump sum is unlikely to be huge, but it does offer more flexibility. Take advice nearer retirement on whether it is more advantageous to take extra pension or lump sum. This will depend on individual circumstances.
Change in annual pension payment limits
Prior to A-Day this was limited to 15 per cent of taxable income, with the amount paid on private pensions also limited by age. Now up to 100 per cent of salary can be invested per annum in a pension scheme with full tax relief (subject to a maximum of £215,000 for 2006/7 and not breeching the LTA).
This new rule benefits part-time GPs, those qualifying or joining the NHS at an older age, and those who have had significant breaks in service. It is particularly useful for anyone in these groups who is nearing retirement and has sufficient funds.
There is now the possibility to boost pension considerably. Unfortunately it is unlikely that these funds will be allowed to be made into the NHS scheme. You will need to look at a private pension.
This rule could also benefit a working spouse, allowing greater pension provision. Always remember that most GPs are likely to have to pay 40 per cent tax on a proportion of pension payments. In general GP spouses earn less, and therefore it is worth considering whether it is more valuable to make extra pension provision for the lower-rate taxpayer. Take advice on this.
Range of investments
Your private pension money can now be invested in a wider range of products including commercial property and property funds. This will allow more flexibility and diversity.
Review your current private pension investments regularly. Take independent advice when needed. Spread investments.
Changes to annuity rules
There are important changes in annuity rules. It is no longer mandatory to buy an annuity with private pension funds from age 75. While for many GPs an annuity will still be the safest option, it is now possible to invest in an 'alternatively secured' pension.
This will allow some funds to be passed on to your estate when you die (although some inheritance tax may be payable). This is not possible with an annuity. It is also possible to take out a short-term annuity with private pension money.
Here the balance of funds is returned after, say, five years of annuity payments. This provides greater retirement flexibility.
Finally it is also possible to take out 'annuity protection lump sum death benefit'. This means that if you die before age 75 the value of the pension fund less annuity payments already made can be passed on to your estate. Once again inheritance tax may be payable.
If you are approaching retirement, take expert independent advice on the best options to suit your circumstances.
In the years leading up to retirement it was perceived wisdom gradually to move any private pension fund investments tied up in shares to less risky bonds and cash deposits. The idea was that the pension fund was then protected from the ups and downs of the stockmarket.
Now that people are living longer, some experts feel it is important to retain stock market exposure for at least some of the fund in the lead up to, and even after, retirement. Over time the stockmarket tends to outperform safer investments.
The many GPs who have private pension funds are generally in a better position than most to do this as they also receive their main NHS pension.
Review the spread of your private pension investments at all times. You may wish to retain some stockmarket exposure.
Many GPs prefer to reduce their workload gradually in the years leading up to full retirement. Indeed the Government actively encourages this as a way of delaying retirement.
While not an A-Day change, there is one recently announced rule that will benefit many GPs. It is already possible to draw an NHS pension from age 60 and continue working without any financial penalty. The only problem is that the GP must take at least four weeks off work first.
The NHS has just announced that in future it will only be necessary to take 24 hours off work and then work a maximum 16 hours per week for the next four weeks. This will be of particular benefit to smaller practices.
John Couch is a GP in Ashford Middlesex