Protecting yourself from the NHS lifetime allowance
There are various protections in place that could prevent NHS Pension Scheme members from falling foul of the Lifetime Allowance Charge. Identifying the best option for your individual circumstances is wise.
Last month’s newsletter looked at the Lifetime Allowance Charge, the Government cap that prevents NHS Pension Scheme members from building up more than a fixed amount of pension rights; above this level, excess charges become payable. As we pointed out, there are certain tapered protections from the NHS pension available from the allowance – and in this month’s newsletter, we’ll explore them in more detail.
In fact, there are four different sets of arrangements that could potentially protect savers from the Lifetime Allowance. Two of these, Primary Protection and Enhanced Protection, are historic, though they may apply to many doctors; the other two, Individual Protection and Fixed Protection are potentially still available.
Primary Protection explained:
The deadline for applying for primary protection passed on 6 April 2009; it was available to those who had pension savings above the Lifetime Allowance that applied on 5 April 2006, which was £1.5m.
The idea was to grant such savers a personal Lifetime Allowance reflecting the capital value of their pensions on 6 April 2006 above the £1.5m cap and enabling them to continue contributing to their pensions and accruing benefits.
In practice, this was done by granting you a Primary Protection factor based on the difference between the value of your pension savings on 5 April 2006 and the £1.5m cap. For example, had your savings been £1.65m – that is £150,000 over the £1.5m cap – you would have been granted a factor of 0.1 (£150,000 divided by £1.5m). When you take your benefits, your Lifetime Allowance is then calculated by adding this factor to the Lifetime Allowance in force at the time. Currently, for example, the cap is £1m, so with a factor of 0.1, this would rise to £1.1m for someone with Primary Protection.
Enhanced Protection explained:
As with Primary Protection, the deadline for applying for Enhanced Protection was 6 April 2009; this protection enabled anyone who wished to take it up to protect all their pension benefits, irrespective of size, from the Lifetime Allowance – as long as their benefits do not increase by more than a set amount between 6 April 2006 and their retirement date.
This set amount is defined by a rule known as the Relevant Benefit Accrual (RBA) test; if you pass this test, you can claim all your pension benefits with no Lifetime Allowance charge.
In practice, the RBA test actually consists of two separate tests: and the capital value of your pension must be lower than one of the following two amounts.
Firstly, the capital value of the pension and lump sum as of 5th April 2006 increased by the greater of 5% a year or the rate of inflation, as measured by the Retail Prices Index, or secondly the capital value of your annual pension and lump sum based on your membership as of 5th April 2006, but using your final years pensionable pay at retirement. Only if you fail both these tests do you fail the RBA test overall.
You could lose Enhanced Protection if:
Nevertheless, the rules can be problematic. You may lose Enhanced Protection if, since 5 April 2006, you have:
- Made contributions to a money purchase pension arrangement such as a personal pension, stakeholder pension or additional voluntary contribution plan
- Built up further benefits in any existing defined benefit scheme, including your existing 1995/2008 NHS Pension scheme, or in a cash balance scheme above the RBA
Or,
- Joined a new pension scheme, unless you are only transferring pension savings from one of your existing schemes into the new scheme;
- Start saving in a new pension arrangement (including the 2015 NHS pension scheme, which is a new pension arrangement for this purpose).
In addition, for GPs, the second test is impractical because ‘pensionable pay’ typically applies to hospital doctors. HM Revenue & Customs has therefore agreed a separate test specifically for GPs. If you are a GP with enhanced protection, you should take specialist financial advice on this issue.
The 2015 NHS Pension Scheme and Enhanced Protection
For doctors who have joined or are considering whether to join the 2015 NHS Pension Scheme, bear in mind that doing so will mean losing Enhanced Protection. Transitional members who have yet to join the 2015 scheme have the option not to join, but this needs careful consideration; take specialist financial advice on this issue.
More generally, given the complications of Lifetime Allowance protections – particularly these historic schemes – it’s important to understand the fine print. If you’re at all unsure about where you stand, seek professional help.
What is NHS Pension Tapered Protection?
Tapered Protection means you’ll join the new 2015 NHS Pension Scheme after the 1 April 2015. The date you join will be determined by your age in years and months as of 1 April 2012.
It is based on how many months beyond 10 years you were from reaching your Normal Pension Age after 1 April 2012. For every month beyond 10 years, the Tapered Protection end date of 1 April 2022 is reduced by two months.
To find out how NHS Pension Tapered Protection affects your start date in the 2015 NHS Pension Scheme, please use the Tapered Protection Calculator here.
Fixed protection 2016 explained
Fixed protection 2016 fixes your lifetime allowance at £1.25m, but you can no longer contribute to private pensions or accrue any additional benefits in your NHS pension excess of inflation. This benefit accrual is measured using the CPI rate of inflation.
This rule is backdated to 6 April 2016, so you may already have fallen foul of it – to avoid losing Fixed Protection 2016, members should have opted out of the NHS Pension Scheme before 6 April 2016; as there has been a period of nil inflation, benefit accrual has automatically been exceeded.
For the purposes of Fixed Protection, contributions and benefit accrual include:
- Pension growth in NHS benefits that exceed a relevant percentage, currently CPI;
for 1995/2008 NHS Pension Scheme members with Tapered Protection, Fixed Protection will be lost when they move and contribute to the 2015 Scheme. - Any contributions paid into a defined contribution scheme, including the NHS Money Purchase AVC Scheme
- You are also prevented from applying for Fixed Protection 2016 if you already have any of the following protections: Enhanced Protection; Primary Protection; Fixed Protection 2012; Fixed Protection 2014
- Doctors who retained their membership of the NHS Pension Scheme after 6 April 2016 will be better suited to applying for Individual Protection 2016, if they meet the qualifying criteria.
Individual Protection 2016 explained:
You can apply for Individual Protection 2016 (also known as ip2016 protection) if your pension benefits were worth more than £1m at 5 April 2016, as long as you don’t already have Primary Protection in place. Doing so will protect your Lifetime Allowance at the value of your benefits on 5 April 2016 or £1.25m, whichever is the lowest – though a charge will still be payable on the excess – plus you can accrue further benefits in any pension scheme, including the NHS.
Having Enhanced Protection or Fixed Protection doesn’t stop you applying for Individual Protection, but it will remain dormant while these protections remain in place. Individual protection is often seen as a safety net, should your enhanced or fixed protection be breached.
Apply for individual protection 2016
To apply for Individual Protection 2016, you will need to know the value of your NHS benefits on 5 April 2016. You will therefore need a valuation from NHS Pensions (known as an IP2016 valuation), which charges £120 for this service. Apply for your IP2016 using form AW295 (Officer- IP2016) or AW295 (GP- IP2016); both are available on the tax information page of the NHS Pensions website.
Once you have the valuation – plus valuations for any other private pensions you have – register for Individual Protection 2016 online through HM Revenue & Customs’ website. HMRC will issue you with a “protection notification number” and a “scheme administrator reference” that you will need to give to your scheme administrator when you decide to take your benefits. This will prove you have Lifetime Allowance protection.
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Content correct at time of writing and is intended for general information only and should not be construed as advice.