Dr Benjamin Holdsworth on why it’s best to review your exact pension position before taking drastic action
If you are considering leaving the NHS or reducing hours in a bid to remove punitive tax bills on pension savings, it could pay to have your figures checked.
Many NHS consultants are facing additional five-figure tax liabilities thanks to the unusual way their NHS pension growth is calculated – but some of these tax charges could be lowered by the outcome of McCloud remedy.
Tax-free pension savings are limited to £40,000 for most people, known as the Annual Allowance. Higher earners will face an even lower limit called the ‘tapered’ Annual Allowance which can be as little as just £4,000.
Doctors can easily breach the Allowance because in defined benefit schemes such as the NHS, the value of pension savings is determined by the deemed ‘growth’ in the year not by the actual contributions. The growth is calculated using the previous year’s September inflation figure meaning pensions could rise by more than 10 per cent this year.
If you are facing tough decisions, please double check your position carefully with expert support to ensure the figures you are working from are accurate. First of all we see many pay and pension figures that are wrong – computer-generated errors are commonplace in Trust administration. This means your starting point is incorrect before you can model possible solutions.
Secondly, it is possible that the McCloud remedy will reduce the Annual Allowance figures for individuals. The McCloud remedy means that NHS members deemed to have suffered age discrimination when the 2015 pension scheme was introduced, will eventually receive their original benefits from the 1995 or 2008 scheme for the seven years of the ‘remedy period’. This runs from 1 April 2015 to 31 March 2022.
No part of the NHS Pension Scheme is ever easy to work out, and the McCloud remedy is no different – but it is possible that it could bring positive news for some. We have found that doctors checking their last three years of Annual Allowance figures, for example, calculate significant tax charges, but when reworked over the seven years of the remedy period, this is reduced.
We will see more problems of this nature in the future as those same doctors start to build up pension in the 2015 scheme once more but it can be a welcome reprieve for the time being.
Dr Benjamin Holdsworth is director of Cavendish Medical – specialist financial planners for medical professionals in the NHS or private practice. For a second opinion on your finances, please contact us on 020 7636 7006. www.cavendishmedical.com
Cavendish Medical Limited is authorised and regulated by the Financial Conduct Authority
The content of this article is for information only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.