reduced pension allowances

Reduced Pension Allowances – Guide for Doctors

Exeter 7 March 2013Torquay 12 March 2013Plymouth 13 March 2013Truro 9 April 2013

Luke Bennett

www.francisclark.co.uk

Introduction

Luke Bennett – Truro office

[email protected]

Stuart Cowen – Plymouth office

[email protected]

Sharon Austen – Exeter office

[email protected]

mailto:[email protected]

mailto:[email protected]


NHS Pension Scheme – Impact of Changes

• 1995 v 2008 sections

• Annual allowance

• Lifetime allowance

• Increasing contribution rates

• Hutton report

• National Employment Savings Trust


NHS Pension Choice

1995 Section 2008 Section

Normal retirement age 60 65Benefits 1.4% earnings plus

lump sum1.87% earnings minus lump sum

Survivor pension 50% 37.5%


NHS Pension Choice

1995 Section 2008 Section

Lump sum Normally 3 x pension

Minimum 4.2% of earnings up to

31/03/2008Maximum 5.36 x

pensionMaximum 4.28 x

pensionAdded years contributions

Continue Cease but benefit to date transferred


Restriction of Tax Relief – Annual Allowance

• £50,000 maximum

• Reducing to £40,000 from 2014/15

• Special rules for defined benefit schemes

• Measured against growth in benefits

• 16 x growth in pension + growth in lump sum



Example for consultants (member of 1995 Section)Salary at 31 March 2011 £110,000Years of service 34Pension rights at 31 March 2011

£110,000 x 34 / 80 £46,750

Increase by CPI (September 2010) 3.1% £48,200

Annual pension input (growth in benefits)



Example for consultants (member of 1995 Section)Salary at 31 March 2012 £118,000Years of service 35Pension rights at 31 March 2012 £118,000 x 35 / 80

£51,625

Pension rights at 31 March 2011 £48,200Growth in pension in year £3,425Growth in lump sum in year (3 x pension) £10,275Annual pension input = 16 x pension growth + lump sum growth

16 x £3,425 + £10,275 £65,075Excess over annual allowance taxed at marginal rate

£15,075 x 40%? £6,030




Likelihood of being affected when annual allowance £50,000



Simplified example for GP (member of 1995 Section)Career earnings at 31 March 2011 £2,000,000“Regulation 72 fraction”

Years in NHS pension scheme 20 1.250Years as a GP 16

Pension = 1.4% of career earnings x Reg 72 fraction1.4% x £2,000,000 x 1.250 £35,000

Increase by CPI (September 2010) 3.1% £36,085

Establish position at 31 March 2011



Simplified example for GP (member of 1995 Section)Career earnings at 31 March 2011 £2,000,000Dynamisation factor for 2012 (CPI to Sep 11: 5.2% + 1.5%)

6.7% £134,000

Pensionable earnings in 2011/12 £110,000Career earnings at 31 March 2012 £2,244,000“Regulation 72 fraction”

Years in NHS pension scheme 21 1.235Years as a GP 17

Pension = 1.4% of career earnings x Reg 72 fraction1.4% x £2,244,000 x 1.235 £38,808

Establish position at 31 March 2012



Simplified example for GP (member of 1995 Section)Value of pension at 31 March 2012 £38,808Value of pension at 31 March 2011 (after allowance for inflation)

£36,085

Growth in pension in year £2,723Growth in lump sum in year (3 x pension) £8,169Annual pension input = 16 x pension growth + lump sum growth

16 x £2,723 + £8,169 £51,737Excess over annual allowance taxed at marginal rate

£1,737 x 40%? £695




• Unused relief from previous three years can be carried forward

• Added years contracts complicate calculations and increase pension growth

• Private pension contributions to be factored in

• NHS Pensions required to calculate figures for 2011/12 and 2012/13 by October 2013

• Self assessment tax return for 2011/12 was due January 2013!


Restriction of tax relief – Lifetime allowance

• Lifetime pension savings limit reduced from £1.8 million to £1.5 million on 6 April 2012

• Further reduction to £1.25 million planned for 6 April 2014

• Calculation based on 20 x pension + lump sum (+ value of any private pension funds)


Restriction of tax relief – Lifetime allowanceExample for member of 1995 Section £Career earnings at retirement

£4.7 million

Pension: 1.4% of career earnings

£65,800

Multiply by factor of 20 1,316,000Lump sum (3 x pension)

197,400

Value of pension 1,513,400For retirement between 6 April 2012 and 5 April 2014 charge on excess over £1.5 million

£13,400 x 25% £3,350 Pension reduced by 1/20th of lifetime allowance charge

Pension therefore reduced from £65,800 to £65,632


Restriction of tax relief

Benefit of extra year’s membership If neither allowance exceeded

£

Pensionable pay 100,000

Employer’s and employee’s contributions 27,500

Tax relief (40%) (11,000)

Increased lump sum (4,200)

Net cost 12,300

Annual pension 1,400

Lifetime allowance charge -

Tax (40%) (560)

Net benefit 840

Effective annuity rate 6.83%



Benefit of extra year’s membership If neither allowance exceeded

If lifetime allowance exceeded

£ £

Pensionable pay 100,000 100,000

Employer’s and employee’s contributions 27,500 27,500

Tax relief (40%) (11,000) (11,000)

Increased lump sum (4,200) (4,200)

Net cost 12,300 12,300

Annual pension 1,400 1,400

Lifetime allowance charge - (403)

Tax (40%) (560) (399)

Net benefit 840 598

Effective annuity rate 6.83% 4.86%



Benefit of extra year’s membership If lifetime allowance

not exceeded

If lifetime allowance exceeded

If lifetime and annual allowance exceeded

£ £ £

Pensionable pay 100,000 100,000 100,000

Employer’s and employee’s contributions 27,500 27,500 27,500

Tax relief (40%) (11,000) (11,000) (11,000)

Annual allowance charge - say 5,000

Increased lump sum (4,200) (4,200) (4,200)

Net cost 12,300 12,300 17,300

Annual pension 1,400 1,400 1,400

Lifetime allowance charge - (403) (403)

Tax (40%) (560) (399) (399)

Net benefit 840 598 598

Effective annuity rate 6.83% 4.86% 3.46%

Comparable open market annuity rate

is 2.5% !


Restriction of tax relief – Lifetime allowance Transitional Protection

• Option to elect for fixed protection

Maintains lifetime allowance at £1.5 million

No contributions after 5 April 2014

Election must be made by 5 April 2014

• Option to elect for personalised protection

Available if pension rights exceed £1.25 million at 5 April 2014

Maintains lifetime allowance at 5 April 2014 value (max. £1.5 million)

Can continue making contributions


Increasing employee contribution rates

2011/12 2012/13 2013/14 2014/15 (possible)

Up to £15k 5.0% 5.0% 5.0% 5.0%

£15k to £21k 6.5% 5.0% 5.3% 5.3%

£21k to £27k 6.5% 6.5% 6.8% 6.8%

£27k to £49k 6.5% 8.0% 9.0% 9.75%

£49k to £70k 6.5% 8.9% 11.3% 12.5%

£70k to £110k 7.5% 9.9% 12.3% 13.5%

£110k and over 8.5% 10.9% 13.3% 14.5%


Reduced monthly drawings fromApril 2013?

Pensionable profit Before tax After tax

£60,000 £120 £72

£80,000 £160 £96

£100,000 £200 £120

£120,000 £240 £144

£140,000 £280 £168


Hutton Report

• Link normal pension age to state pension age

• Final salary schemes replaced by career average earnings schemes

• Implement changes by 2015


Government offer

• New scheme from 1 April 2015

• Those within 10 years of retirement at 1 April 2012 stay in existing scheme

• Date of joining new scheme delayed for those between 10 and 13.5 years of retirement at 1 April 2012


Protection

Age at 1 April 2012 (if member of 1995

scheme)

Switch to new scheme

<46.5 1 April 2015

47 1 April 2016

47.5 1 April 2017

48 1 April 2018

48.5 1 April 2019

49 1 April 2020

49.5 1 April 2021

50 N/A


New NHS Pension Scheme

• Career earnings for all members (GPs already on career earnings)

• Dynamisation continues at inflation + 1.5%

• Accrual rate 1/54th = 1.85185%

• Normal pension age linked to state pension age

• State pension age = 67 or 68?


Protection for accrued benefits

45 46 47 48 49 50 82%84%86%88%90%92%94%96%98%

100%

Value of new scheme compared with 1995 Section

Age at 1 April 2012

Assumes member joined scheme at 25 and retires at 60


Accountancy/Tax advice IFA advice

Annual allowance calculation Stop paying into NHS Scheme?

Lifetime allowance calculation Take early retirement?

Prediction of NHS pension Elect for fixed protection?


National Employment Savings Trust

• All employers compelled to offer either a Qualifying Workplace Pension Scheme (e.g. NHS) or NEST

• Will affect non-NHS employing bodies

• Employer contribution 3% to 4%

• Employee contribution 3% to 4%

• Opt-out option for employee

• Phased introduction up to 2017


NHS Pension(average earnings £100,000 per annum)

Lifetime contributions

Retirement age

Pension Lump sum

£ £ £

1995 Section 752,500 60 45,573 188,125

2008 Section 860,000 65 56,883 215,000

New scheme? 1,182,500 68 54,995 295,625


NHS Pension Personal Pension(average earnings £100,000 per annum)

Lifetime contributions

Retirement age

Pension Lump sum

£ £ £

1995 Section 752,500 60 45,573 188,125

14,742

2008 Section 860,000 65 56,883 215,000

20,711

New scheme? 1,182,500 68 54,995 295,625

32,086


(c) copyright Francis Clark LLP, 2013

You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically, publish, broadcast or otherwise circulate either within your business or for public or commercial purposes any of (or any part of) these materials and / or any services provided by Francis Clark LLP in any format whatsoever unless you have obtained prior written consent from Francis Clark LLP to do so and entered into a licence.

To the maximum extent permitted by applicable law Francis Clark LLP excludes all representations, warranties and conditions (including, without limitation, the conditions implied by law) in respect of these materials and /or any services provided by Francis Clark LLP.

These materials and /or any services provided by Francis Clark LLP are designed solely for the benefit of delegates of Francis Clark LLP. The content of these materials and / or any services provided by Francis Clark LLP does not constitute advice and whilst Francis Clark LLP endeavours to ensure that the materials and / or any services provided by Francis Clark LLP are correct, we do not warrant the completeness or accuracy of the materials and /or any services provided by Francis Clark LLP; nor do we commit to ensuring that these materials and / or any services provided by Francis Clark LLP are up-to-date or error or omission-free.

Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protected material is subject to current law and related regulations on the re-use of Crown copyright extracts in England and Wales.

These materials and / or any services provided by Francis Clark LLP are subject to our terms and conditions of business as amended from time to time, a copy of which is available on request.

Our liability is limited and to the maximum extent permitted under applicable law Francis Clark LLP will not be liable for any direct, indirect or consequential loss or damage arising in connection with these materials and / or any services provided by Francis Clark LLP, whether arising in tort, contract, or otherwise, including, without limitation, any loss of profit, contracts, business, goodwill, data, income or revenue. Please note however, that our liability for fraud, for death or personal injury caused by our negligence, or for any other liability is not excluded or limited.

Disclaimer & copyright

Luke Bennett - [email protected]

01872 276477

Stuart Cowen - [email protected]

01752 301010

Sharon Austen - [email protected]

01392 667000

reduced pension allowances

Business