Pensions are a complicated issue for doctors, with many becoming worried that they need to pay extra tax as well as the standard income tax. Over recent years pension tax rules have become increasingly stringent, to the extent that some doctors believe staying in the NHS Pension Scheme could result in them being penalised for exceeding limits on how much pension benefits they can build up each year, and then, how much they can withdraw when they come to retire. However, despite its tightening grip, the Government, in encouraging people to save for their retirement, still offers pension tax saving opportunities that can’t be ignored.
Is my NHS pension taxable?
Notwithstanding the fact that you are entitled to draw a tax-free lump sum from your NHS Pension, your benefits are otherwise considered as earned income and are taxed as such. There are no National Insurance contributions deducted from your NHS pension.
Many doctors are opting out of the NHS Pension Scheme driven by issues regarding tax. The BMA has called on the Government to do something about this as the number of medics choosing to retire early is causing concern within the healthcare service.
It is not only medical professionals who are, at times, unaware of how the tax system works, many financial advisers and accountants are equally confused by the complex and detailed NHS Pension Scheme.
According to Phil Bowler, Head of Technical Support at Chase de Vere Medical, during the many years of advising clients, there have been very few occasions when opting out of the NHS Pension Scheme has been the right thing to do for doctors.
He urges those doctors who are considering leaving the scheme to seek independent financial guidance first, and, for those who have already left the NHS Pension Scheme, it could be worth re-joining.
As a member of the NHS Pension Scheme you could have an additional tax liability if your pension savings exceed limits set by HM Revenue and Customs (HMRC).
These limits are known as the annual allowance, which is calculated each year, and the lifetime allowance, which is calculated based on overall pension benefits when you actually draw them.
The annual allowance is the total amount of benefits that you can build up in a defined benefit pension scheme, like the NHS Pension Scheme, each year and/or the amount of contributions that can be paid to defined contribution pension schemes like personal pensions. It is set by HMRC and applies to any registered pension scheme (and certain non-UK pension schemes) but it doesn’t include the State Pension. The standard annual allowance limit is currently set at £40,000.
If your pension savings or benefit accruals are more than the annual allowance (in one tax year), you will receive a tax charge on the additional amount. The tax rate charged will reflect your marginal income tax rate. The charge can either be paid personally by you or, in some cases, out of your pension scheme benefits.
It is possible to carry forward any unused annual allowance from the previous three tax years, providing you are a member of a qualifying pension scheme, at some time during each tax year being carried forward from. This is a very broad rule. ‘Member’ includes:
- Active: currently accruing/ building up benefits in the scheme, paying individual contributions or receiving contributions on their behalf, for example, from an employer or any other third party
- Deferred: has a paid-up fund, or a right to receive pension benefits at a later date
- Pensioner: receiving payment of benefits from the scheme, such as a scheme pension
- Pension credit: member has received a pension credit (following a divorce and as directed in a pension sharing court order)
Tapered annual allowance
The Government’s tapered annual allowance rules introduced in April 2016 mean that if you’re an NHS doctor who is deemed to have a threshold income over £200,000 and an adjusted income above £240,000, your annual allowance will be lower than this £40,000 limit. In fact, tapering can reduce your annual allowance to just £4,000. It’s crucial to check whether you’re affected by the taper. NB: Lower income limits applied to tax years 2016/17 to 2019/20 (£110,000 and £150,000 respectively and the annual allowance could reduce to a minimum of £10,000) – these figures are relevant when considering what carry forward might be available from those tax years.
The lifetime allowance is the total amount of pension benefits which can be built up within your pension schemes, without incurring a tax charge. As with the annual allowance, the lifetime allowance is set by HMRC and the current limit is £1,073,100 and will remain as such until 2026.
There are a number of things that can instigate this charge including long pension membership, high earnings and private pension investments. If you do exceed the lifetime allowance you may be at risk of incurring this charge at retirement.
Life after work
You are a medical professional with a career devoted to taking care of others. When it comes to considering life after work, it is important that you take care of your pension and plan carefully for retirement.
You need to be aware of your total NHS Pension savings and how you plan to enjoy life when the time comes to stop working – including actions you may wish to take in relation to the annual and lifetime allowance limits.
Your aspirations for a well-earned retirement will be as individual as you are.
At Chase de Vere Medical we have provided financial services to doctors for 16 years.
Our experience and independent advice mean your plans will be tailored to meet your specific needs. Our specialist knowledge will help you enjoy the retirement you have worked so hard for. Get in touch today to find out more.
Content correct at time of writing and is intended for general information only and should not be construed as advice.