As the January year-end approaches, many GPs will be questioning whether they should defer (or even stop) their membership of the NHS pension scheme because they have contributed more than the threshold allows. But if they do, they can expect a bigger tax bill. This would be by at least 40% of the contributions they are no longer paying, or possibly 60%. For many GPs, pension contributions take their taxable income below the magic £100,000 level at which the personal tax-free allowance is lost. GPs earning between £100,000 and £120,000 face an effective tax rate of 60%.
The risks of a pension ‘holiday’
There is a group of GPs who are unlikely to breach the annual allowance limit but may exceed the lifetime allowance limit, currently equivalent to an NHS pension of £54,347, before they reach retirement age. Many of these GPs are thinking about taking a pension contribution ‘holiday’. But they should think carefully.
There are two significant changes that could have a negative impact. The first relates to the dynamising uplift on the GP’s earnings in their career so far (the mechanism that revalues the GP’s previous earnings so they reflect their current value). GPs aged 55 and over would lose the 1.5% uplift that is added to the inflationary increase. GPs under 55 would lose both the CPI increase and the extra 1.5%. This might not have too much impact over just one year, but significant losses could mount up for GPs who defer membership for longer.
Also, death in service benefits would change, which for a young GP might approach £200,000. If the GP decided to defer pension contributions this benefit could drop to £40,000.
GPs may also lose out under impending changes to the NHS pension scheme, due next April. Although we know what is happening in general terms, there is no guarantee that deferred GPs older than 50 on 1 April 2012 would be allowed to resume the 1995 terms when the new scheme comes in during 2015. At this age, had they continued contributions, they would have the option to stay, rather than move to the new scheme, which is likely to have reduced benefits.
Bob Senior is chair of the Association of Independent Specialist Medical Accountants and head of medical services at Baker Tilly