From 6 April 2016, the pensions Lifetime Allowance (LTA) will be reduced to £1 million (previously £1.25 million).
What is the Lifetime Allowance?
The LTA is the maximum amount of pension savings you can build up without being subject to an extra tax charge (the “Lifetime Allowance Charge”). This is relevant to members of the NHS Pension scheme, and is likely to impact on a significant number of GPs, consultants and other senior NHS members of staff.
Will this change again moving forward?
The recent reduction to the LTA continues the downward trend dating back to 2012/13, at which point the Lifetime Allowance was £1.8 million. The proposal from 2018, is that the LTA will be indexed to the Consumer Prices Index (CPI). The significant reductions that have already been applied to the LTA (a drop of over 44% since 2012/13) will mean that more and more healthcare professionals will be caught out over the coming years.
What are the tax charges?
If your total pension benefits exceed the LTA, a Lifetime Allowance Charge will apply on the excess benefits over the LTA. The LTA charge is 55% if the excess is taken as a lump sum, or 25% if it is taken as a part of the pension (which would then be subject to income tax).
How can I work out if I am affected?
This is relatively straightforward. You can request an estimate of your NHS pension scheme benefits from NHS Pensions in Fleetwood.
Once you have this, the capital value of your pension (for LTA purposes) is calculated by multiplying the amount of pension you are expected to get in the first year by a factor of 20, and then adding the cash lump sum you are expected to receive on retirement.
For example, if your pension is estimated to be £50,000 per year with a lump sum of £150,000, the capital value for LTA purposes is calculated by multiplying the £50,000 per annum by 20 (£1 million) and adding the lump sum of £150,000, giving a deemed capital value of benefits (for LTA purposes) of £1,150,000.
What would happen if the capital value of my pension benefits exceed the LTA?
In this instance, when you retire, you would receive a statement from NHS Pensions telling you how much tax you owe on the excess. This is then deducted from your pension at the point that you are about to start receiving it. However, with forward planning, it may be possible to reduce your exposure to LTA tax charges, which is why it is important to review your pension position now.
Using the example above, a pension with a capital value of £1,150,000 is currently within today’s (2015/16) LTA of £1.25 million, but it would be caught out by the reduced LTA from 6 April 2016.