Accountancy
Major changes to pensions are on the horizon
Benefits, contributions and taxation changes to pensions are in the pipeline. Martin Murray reports
Most cosmetic practitioners are, or have been, members of the NHS pension scheme. Many of you will have received the NHS pensions options choice in which you could decide to remain within the 1995 scheme or transfer to the new 2008 scheme.
For many doctors who had started with the NHS after leaving university without any major breaks, the choice was relatively straightforward and depended on whether you wanted to work to 60 or 65. For others, particularly nurse practitioners, choosing between the two was more difficult.
In addition, there is a consultation document that deals with increasing contributions to fund the scheme. The results of this and the wider public sector review will not be known for some time.
The big changes in taxation in the current year and with effect from April 2012 are changes in what is known as the annual allowance and lifetime allowance. These changes will affect those with high or previously high earnings within the NHS. These changes were brought about to generate an additional £3.5bn–£5bn.
It is anticipated that the impact on any cosmetic nurse practitioner will be minimal. However, for certain cosmetic doctors, professional advice is needed.
The annual allowance for the current year dropped to £50,000 from the previous £255,000. This figure relates to what tax relief can be obtained on pension contributions. For private pensions, any contribution reduces it on a £1 for £1 basis. For cosmetic doctors employed within the NHS and general medical practitioners, it is based on the deemed increase in benefits from the beginning of the tax year to the end.
Most cosmetic doctors should not exceed the limit. Those likely to exceed it will be any cosmetic doctor who pays large amounts into a private scheme and, or, receives a large pay rise, say, by a merit award in the current year.
For general medical practitioners, a large rise in their share of practice profits, such as moving up to parity with other partners, may trigger an infringement.
The biggest change that takes effect from 6 April 2012 is the reduction in what is known as the lifetime allowance from its present £1.8m to £1.5m. There have been many articles and publications relating to this change and methods of protecting oneself from any future impact. Unfortunately, some have been misleading and also wrong. At the end of November 2011, the Revenue published further clarification of what are very complex rules.
For a cosmetic doctor to exceed the reduced lifetime allowance of £1.5m, he or she requires an annual pension from the NHS of £65,217 with a lump sum of £195,652 before what is known as commutation is factored in. Commutation is the process whereby a person retiring from the NHS can elect to take a reduced annual pension for an additional lump sum. Each £1 of annual pension commuted generates an additional £12 of a lump sum benefit.
During the current year, commutation can be used to reduce the notional value of the NHS pension for comparison with the lifetime allowance and for some doctors avoid a tax recovery charge. This loophole will not be available from 6 April 2012.
For example, a cosmetic doctor with an NHS pension anticipated to be £75,000 would have a capital value of the NHS pension equate to £1,725,000. Of this pension, £75,000 will be paid annually and £225,000 as a lump sum before commutation is decided on.
This exceeds the lifetime allowance of £1.5m by £225,000, which will be subject to an additional tax charge. This is either 55% of the value of the lump sum threshold exceeded or 25% divided by a factor of 20 to be deducted each year from the annual pension of the amount by which the lifetime allowance has been exceeded.
In this example, the 55% will not apply since the lump sum threshold of £1.5m equates to £375,000, so the 25% charge is applied. Based on £225,000, the person retiring will have a tax charge of £56,250 divided by 20 so that his or her pension each year will be reduced by £2,812.50. In respect of an annual pension of £75,000, this is not as great a hit as many commentators erroneously said, giving the impression 55% tax is payable immediately on the excess.
In this example, the person retiring through commutation could increase their lump sum, not suffer a 55% tax charge and incur only the 25% divided by 20, which has less of an impact.
Private pension schemes to be taken as a lump sum should be discussed with your financial adviser, in light of what is available from the NHS and to remain below the threshold of when the 55% is applied.
There are forms of protection from the changes. Some may have what is known as enhanced or primary protection, which are historical and rare! Thankfully, the government will honour these in respect of the new rules.
There is a new form available which needs to be applied for before 5 April 2012. This is known as “fixed protection”. Unfortunately, it is neiither as good nor as flexible as that of its historical predecessors. For all but the few, this means that you have to cease contributing to the NHS pension scheme to stand a chance of qualifying.
If you pay into any private scheme after 6 April 2012 you will not be eligible unless it was part of a life insurance policy.
For those who may be affected and can take advantages of protection, advice needs to be sought from your financial adviser. For those who are basically too young to defer membership of the NHS pension scheme, here’s hoping to the limit being uplifted. If it is not, try not to exceed the lump sum thresholds, incurring a 55% tax on the excess.
Martin Murray is a partner at Sandison Easson & Co, a specialist medical chartered accountancy firm with offices in London and Cheshire. Tel: 01625 527 351; 0207 307 8759; E: info@sandisoneasson.co.uk; W: sandisoneasson.co.uk
