Consultants who have been limited in their GP pension planning due to the annual allowance rules have more options thanks to changes in the Budget earlier this year. Some may even be in a position to increase their pension provision.
For many years, doctors and GPs have been impacted by the annual allowance which has resulted in some paying extra tax on their pension savings – but changes announced in the Spring Budget could at last make it possible for doctors and GPs, particularly consultants, to pursue new GP pension savings opportunities.
At a general level, the Budget made headlines for the Chancellor’s decisions to remove the lifetime allowance charge – payable on pension savings that exceed a set threshold when people begin drawing from them – and to increase the standard annual allowance from £40,000 to £60,000 from 6th April 2023. These changes will be welcomed by many doctors and GPs, but the Budget also included additional measures specifically targeted at the medical profession. It’s worth stating at the time of writing the announcements made in the Spring Budget have not yet been passed into law and further changes could arise as the Finance Bill makes its way through the parliamentary process and the Bill receives royal assent.
Linking the input amounts
The 1995/2008 Scheme, which is also known as the 1995 and 2008 Sections and the 2015 NHS Pension Scheme are separate schemes for HM Revenue & Customs purposes. As a result, when consultants calculate their input amounts – the value of their annual GP pension savings for annual allowance purposes – they were not able to offset one against the other. From 6th April 2023, the Chancellor has linked public service pension schemes which includes the NHS pension schemes for the purposes of the annual allowance.
This is important because the 1995/2008 schemes are now closed for new benefit accrual. The input amount they generate for consultants each year therefore depends entirely on the increase in pensionable pay that consultants receive, as their GP pension benefits are uprated in line with this increase. The rules allow you to adjust the annual allowance calculation for inflation, so in years where pensionable pay rises at a rate below inflation, consultants’ input amounts from the 1995/2008 schemes could turn out to be negative. Previously, in negative input amount years, the input amount from 1995/2008 was deemed to be zero; but now the schemes are linked to the 2015 NHS Pension Scheme, a negative input amount can be deducted from any positive amount in the latter. The effect is to reduce the overall input amount for the annual allowance.
The worked example in the box shows how this can work out in practice. For a consultant with 20 years’ service, the negative input amount for 2023-24 from the 1995 NHS Pension Scheme completely wipes out the input amount from the 2015 NHS Pension Scheme. Previously, the negative input amount from the former would not have made any difference to the consultant’s overall position.
| How the new rules work in practice The following example is based on a consultant who has 20 years’ service in the 1995 NHS Pension Scheme, with pensionable pay of £100,000 in 2022-23, rising to £102,000 in 2023-24 1995 NHS Pension Scheme input amount 1995 annual allowance opening value. Pension value 20/80 x £100,000 = £25,000pa plus £75,000 lump sum Opening value before inflation £25,000 x 16 + £75,000 = £475,000 Opening value after inflation £475,000 x 1.101 (10.1%) = £522,975 1995 Annual Allowance closing value. Pension value 20/80 x £102,000 = £25,500pa plus £76,500 lump sum Closing value £25,500 x 16 + £76,500 = £484,500 1995 NHS Pension Scheme input amount: £484,500 – £522,975 = – £38,475 2015 NHS Pension Scheme input amount 2015 annual allowance opening value. Pension value £100,000 / 54 = £1,852pa Opening value before inflation £1,852 x 16 = £29,632 Opening Value after inflation £29,632 x 1.101 (10.1%) = £32,624 2015 annual allowance closing value. Pension value £102,000 / 54 = £1,889pa £1,889 + £1,852 = £3,741 £3,741 x 1.116 (11.6%) = £4,175 Closing value £4,175 x 16 = £66,800 2015 NHS Pension Scheme input amount: £66,800 – £32,624 = £34,176 Total Linked input amount across both schemes (2023/24): -£38,475 (1995 scheme) + £34,176 (2015 scheme) = -£4,299 therefore NHSPS input amount = £0 |
Adding to pension savings
In some years, the effect of linking the NHS schemes in this way could be dramatic, enabling consultants to make significant additional GP pension provision without any fear of incurring annual allowance tax charges. In the example, the linkage wipes out £34,176 of input amount that the consultant would otherwise have had to worry about. For a consultant with more years of service, the amount would have been even higher.
It’s important to recognise that the combined input amount from the NHS Pension Schemes cannot be negative – it is zero in the example, rather than -£4,299. As a result, the final figure cannot be offset against input amounts in other schemes and a negative growth cannot be carried forward from previous years. Nevertheless, consultants still have much more room for manoeuvre here. It won’t always make sense to increase GP pension provision, so it is important to take professional advice, but the new rules represent a significant improvement on what went before.
Two ways to save more
For consultants who do want to increase their provision, the first option is to make an additional GP pension purchase in the NHS Pension Scheme itself. It is possible to buy increases to annual pension income in £250 increments. The cost of doing so depends on the age of the saver and the options they choose, but as an example, it would cost around £3,000 for a 46-year-old consultant to purchase £250 of additional GP pension, with dependant’s cover. The extra pension increases in line with CPI inflation from the point of purchase until retirement.
Where consultants pay for the additional pension with a one-off lump sum, the extra income counts towards their input amount calculation for the year. In the worked example above, a £250 additional pension would increase the input amount from £34,176 to £38,176, which would still result in an overall total input amount of £0 for the NHS Pension Schemes. That leaves the consultant free to make use of their £60,000 annual allowance elsewhere.
Alternatively, it is also possible to pay for additional GP pension in instalments. In which case, the input amount is adjusted according to the value of the instalments made each year as a proportion of the total owed. For example, a consultant buying £250 of extra income through 24 monthly instalments would have made 12 monthly instalments at the end of the first year; that would add £125 to the input amount calculation.
Another possibility for consultants increasing their GP provision is to do so through contributions to a personal pension. It may make sense to build up benefits outside the NHS Pension Scheme so that they have additional flexibility at retirement. For example, they might want to take a lump sum from their personal scheme before they access the NHS Pension Scheme, reducing the size of the lump sum they take from the latter and therefore increasing their GP pension income.
It is even possible to combine an additional GP pension purchase and personal pension contribution. Either way, a professional adviser can help work through the detail of the options available.
In some cases, it may not be appropriate to make additional GP pension contributions at this time. For example, a consultant expecting to report a large input amount in future years – because of a pay increase, perhaps – may want to keep hold of as much annual allowance as possible to offset against this risk.
Any unused annual allowance from the 2023-24 year can be carried forward to the 2024-25, 2025-26 and 2026-27 tax years, so this flexibility could prove very useful.
Proceed with caution
While the linking of the NHS Pension Schemes may create an opportunity to increase GP pension provision, it’s important to tread carefully. One issue is that not all members will be able to take advantage of the high inflation calculation in their annual allowance.
These include: GPs; most members of the NHS 2008 Pension Scheme; some members with added years; members who have made additional GP pension purchases in 2023/24 already; members who have contributed to a personal pension; members who are not using the most recent years’ pay when calculating their final salary using the best GP pensionable pay in the last three years; members who are due a large increment or pay rise; members with high 2015 accrual; members who can’t afford to make any additional contributions; and members who don’t have the relevant earnings to receive tax relief on the contributions.
Another problem is that consultants do not yet know what pay increase they will receive for the 2023-24 tax year. A significant increase could reduce or even wipe out their expected net negative input amount. The NHS Pension Scheme won’t be able to confirm the estimated input amount for 2023-24 before the end of the tax year as the earliest they usually confirm this is the following October.
It therefore makes sense to delay a final decision about GP pension provision until final pay increases are announced. And if you have any doubts at all about the best course of action, seek independent advice.
Content correct at time of writing and is intended for general information only and should not be construed as advice.