The Spring Budget presented on March 15 introduced pension reforms aimed at assisting doctors who wish to extend their careers or return to work.
These changes will significantly impact doctors’ pensions, and in this article, we provide answers to some of the most frequently asked questions following the announcement.
Question: The annual allowance has been modified. Does this change mean that, as a doctor, I no longer need to be concerned about paying an annual allowance charge on my pension?
Defined benefit schemes, such as the NHS pension, base the annual allowance test on the increase in the value of benefits, while defined contribution schemes rely on pension contributions. The annual allowance has been frozen at a maximum of £40,000 in recent years. The complex formula used to determine the value of benefits in defined benefit pension schemes, like the NHS Pension, has led to many doctors unintentionally exceeding this allowance and incurring substantial tax charges.
Starting from April 6, 2023, the annual allowance will see a 50% increase, reaching £60,000. This change will benefit numerous doctors by significantly decreasing the number of those facing large pension tax bills and removing the incentive to cut work hours. However, it may still affect top-tier doctors, and while the numbers impacted should decline and the tax charge for those surpassing the limit will be smaller, it may not provide a comprehensive solution for senior NHS doctors. Consequently, these doctors will need to continue planning their work schedules with care.
Question: I’ve heard that some individuals may not fully benefit from the increased annual allowance. Can you confirm this?
Indeed, the Chancellor has kept the tapered annual allowance, though with a somewhat more generous configuration. This allowance primarily affects high earners –whose income, NHS pension growth, and private pension contributions exceeded £240,000 before April 6 2023. This figure is known as the adjusted income limit. If impacted, your annual allowance diminishes by £1 for every £2 above this sum; individuals with an adjusted income of £312,000 or more had an annual allowance of only £4,000.
Starting April 6, 2023, the adjusted income limit will rise to £260,000, and the minimum annual allowance will increase to £10,000 for people with adjusted incomes of £360,000 or more.
Question: Are there any other annual allowance changes that could impact doctors?
Starting from April 6, a crucial change will be implemented concerning negative growth within the 1995/2008 Scheme. This occurs when an annual pay award is lower than the previous year’s inflation, causing a higher opening value and resulting in a negative pension input amount, which was previously displayed as zero. However, for the 2023/24 fiscal year, any negative growth in the 1995/2008 scheme can now counterbalance positive growth in the 2015 Scheme. It is important to note that carry forward rules remain in effect, allowing individuals to utilise any unused allowance from the preceding three years.
Question: The government announced the abolition of the lifetime allowance, but what are the implications of this change?
The lifetime allowance limits the value of pension benefits an individual can accumulate, with the cap set at £1,073,100. Any benefits exceeding this allowance were subject to a tax rate of 25% if the excess is received as income and 55% if taken as a lump sum. Starting from April 6, there will be no lifetime allowance tax charge on excess benefits beyond the lifetime allowance, and the lifetime allowance will be completely abolished from April 2024.
Question: Does this mean there are no more restrictions on the NHS Pension when withdrawing it?
One restriction remains in place. Generally, for pensions, you can take up to a quarter of your fund as tax-free cash, with a maximum of 25% of the lifetime allowance. In the future, there will still be a limit on tax-free cash. Thus, even after the lifetime allowance is abolished, you typically won’t be allowed to take a tax-free lump sum – also called the pension commencement lump sum – exceeding £268,275, regardless of your fund size. However, if you have some form of lifetime allowance protection, you may be eligible for a higher amount of tax-free cash.
To gain insights into the impact of these changes on your unique situation and obtain tailored guidance, feel free to contact us.
Content correct at time of writing and is intended for general information only and should not be construed as advice.