Pensions – The Annual Allowance

Many GP’s will be affected by the reduction in both the Annual Pension Allowance and the Lifetime Pension Allowance.

Annual Allowance

The annual allowance is the maximum amount that an individual’s pension savings can grow in one year without a tax implication.  The Annual Allowance limit covers all your pensions except the State Pension and therefore includes the NHS scheme and any private pension.  If you exceed the annual pension allowance you may face an additional tax bill.

Prior to 5th April 2012, an individual’s pension could increase tax free in a year by up to £255,000.  This was reduced to £50,000 for the 2012 tax year and will reduce further to £40,000 by the year ending 5th April 2015.

Many GP’s look at the amount of superannuation they pay each year and assume that as this figure is less than £50,000 (soon to be £40,000), they will be unaffected by this change in legislation.  However, for defined benefit pension schemes, such as the NHS scheme, the Annual Allowance value is a ‘deemed’ amount based on the increase in pension benefits over a tax year.  It is not based on the amount of superannuation paid in a tax year.

It is difficult to predict in advance who might be affected by the Annual Allowance Charge.  If you have exceeded the Annual Allowance, the pension agency will write to you after the end of the tax year but if you have a separate personal pension this will not be taken into account and you may have exceeded the limit without being aware of this.

Who is most likely to be affected?

The following GP’s  are most likely to be affected:

  1. Members buying “Added Years” or “Additional Pension”.
  2. High-earners and members with Enhanced Protection.
  3. Members with long service and/or significant promotion or pay rises.
  4. Members retiring on redundancy grounds where some of the redundancy money is diverted into the pension scheme to provide additional benefits.
  5. Members with special class status.

How We Can  Help

We correspond with the NHS Pension authority on your behalf to obtain details of your NHS Pension growth.

We can then advise you if together with other pensions, you have exceeded the annual allowance or alternatively if there are allowances available to carry forward.

We can put you in touch with a specialist medical IFA who can advise you of your various options.