Long-term pension planning requires an element of stability but, since the national deficit has begun to bite, the Government has been placing constant constraints on pension savings. GPs have been squeezed from both sides and everyone is being affected by the increases in contribution rates. Also, some GPs in their fifties, and some higher earners, are already suffering restricted tax relief from the reduced annual allowance. The further reductions in the annual allowance and lifetime allowance, and the significantly increased contribution rates for 2013/14, are now going to force far more GPs to review their pension planning.
Know your limits
The overall lifetime allowance for an individual’s pension fund is being reduced from £1.8m to £1.5m for 2012/13, and there are proposals to further reduce this to £1.25m from 2014/15. The tax on funds that exceed the limit is 55% on the excess if the excess is taken as a lump sum, and 25% if taken as pension (charges apply when you draw your pension).
The lifetime allowance is calculated by applying a factor of 20 to the annual pension plus the lump sum. For those taking a lump sum of three times their pension, this means that those GPs with pensions in excess of £65,217 are caught by the lifetime allowance charge. However, once the lifetime allowance is reduced to £1.25m, GPs with pensions over £54,348 will be caught too.
Avoid the cut
GPs who are likely to be close to the lifetime allowance (and may potentially be caught when the annual allowance is reduced from £50,000 to £40,000 in 2014/15) should consider the following:
• ceasing their Added Years contracts. It is no longer necessary to plead financial hardship but this is an irrevocable decision so advice should be sought
• suspending contributions into personal pensions and Additional Voluntary Contributions while present allowance limits are in force. Reducing pension contributions also cuts tax relief, so alternative tax-efficient investments should be considered.
Protect your investment
It will be possible to make a protective election before April 2014 to safeguard the current limit of £1.5m but if that election is made, all contributions into pension funds have to cease. It is important to seek advice on this once the full rules have been announced.
GPs near retirement will want to think about an election, but younger GPs will have to consider the impact of leaving the NHS scheme and ceasing contributions, when the lifetime allowance may increase before they retire.
If you are likely to want to make a protective election before April 2014 and you have scope against the annual allowance, it is worth maximising your pension contributions under the present limits to build up as big a pension as possible before ceasing contributions.
Valerie Martin-Long is national director of medical services at PKF. You can reach her on 01483 564646 or at email@example.com. This article developed in association with PKF. Pulse retains editorial control of this content.