Collecting your pension lump sum upon retirement is seen as the worthy reward for a long, high-pressure career but some doctors make hasty decisions about their pot of cash without realising the full consequences.
If you have more than one pension arrangement you should be careful about the order in which you take your benefits.
You should be wary of the Lifetime Allowance (LTA) – the total pension savings you can build before attracting tax. The sum of your separate pension plans will be tested against the LTA with any excess being heavily taxed (55 per cent). The LTA has now been cut to £1.25million so the cap on the lump sum that can be paid free of tax is £312,500 (25 per cent). In our experience this is a low enough level for many higher earning consultants to be caught out.
The amount of lump sum you take from your NHS pension should be well considered. There are various pros and cons of drawing the standard (if part of the 1995 scheme) or mandatory (2008 scheme) lump sum as opposed to drawing a higher amount in return for a reduced pension.
If you take the full NHS lump sum amount, this may not leave any Lifetime Allowance for private pension lump sums. However, if you take the private pension lump sum first – say £50,000 – this would still allow £262,500 to take tax-free from your NHS fund. Remember your NHS pension is an index-linked income, paid for life, so it may be better to draw a smaller lump sum from your NHS provision.
For those with pension funds that exceed their available Lifetime Allowance, increasing the NHS lump sum actually reduces the capital value of NHS benefits and may help to mitigate a Lifetime Allowance charge wholly or in part. The best route to take will depend on your individual circumstances and marginal income tax rate.
If you are affected by the reduced LTA limit you may have already applied before this April’s deadline for Fixed Protection ’14 to safeguard the higher allowance of £1,500,000. If you haven’t it is now too late to apply for this protection.
However, you may still qualify for the government’s new protection plan, Individual Protection ‘14 (IP14), if the value of your pension rights exceeded £1.25m in April ‘14. The scheme will allow you to protect your current pension fund value up to £1.5 million. Importantly, you will still be able to accrue benefits through both the NHS and private pension schemes without losing the protection.
If you do nothing the standard Lifetime Allowance will apply, your maximum available tax-free lump sum may be restricted and any pension income deemed to be “excess” will be taxed at 25 per cent before your normal income tax rate is applied, which for most, will be at the higher rate which means an additional 40 per cent.
Even if you believe you have the right protection in place you should not delay in checking your own position as most forms of pension protection are not guaranteed and can be easily lost through simple errors, the majority of which you will be completely unaware of. Unfortunately, we have helped many new clients who have previously been poorly advised in this area.