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Budget update for medical professionals

By: Graham Walker Date: 16 October 2015
Category: Article,Lovewell Blake Financial Planning

Lifetime allowance reducing to £1 million
As stated in our last alert, the lifetime allowance is reducing to £1million as at 6 April 2016. If you are a member of the 1995 section of the NHS pension scheme this equates to an annual pension of £43,478, or £50,000 for a 2015 section member.

As with every reduction in the lifetime allowance, the government is introducing transitional protection measures to allow you to shield your funds against the worst impacts of the reduction.

There will be two forms of transitional protection:

1. Fixed Protection 2016
This allows you to keep a £1.25 million lifetime allowance beyond 2016 but as before with Fixed Protection there is a trade-off:
  • Contributions to any money purchase arrangement have to stop after 5 April 2016.
  • Increases in defined benefit pension schemes cannot exceed the relative percentage (normally CPI for the previous September) in any tax year from 2016/17 onwards.

2. Individual Protection 2016
Individual Protection 2016 is only available if you have pension savings worth more than £1million on the 5 April 2016. This protection gives you a personal lifetime allowance equal to your benefit value on the 5 April 2016 (up to a maximum of £1.25million).

Unlike Fixed Protection, Individual Protection 2016 comes without the need to stop funding your pension arrangements.

The process for registering for protection will change. You will no longer have to notify HMRC in advance of applying for Fixed Protection, or have three years to apply for Individual Protection. New deadlines are currently under consideration and are due to be announced by HMRC later this year.

Should I take my personal pension benefits now or defer them for the future?
We have many GP clients who have not only NHS pension benefits but also have built up personal pension funds as well. Recent experience has shown that most GP’s will take the benefits from their NHS pension but defer taking any monies from their personal pensions for fear of creating a crystallisation event and their funds being subject to a potential tax charge of 55%. This issue may need closer inspection for those GP’s who did not fully utilise their lifetime allowance when they crystallised their NHS pension benefits and still have some allowance remaining.

If you had 10% of your lifetime allowance remaining after you crystallised your NHS pension benefits when the lifetime allowance was £1.5million you would have had £150,000 of your lifetime allowance available for the crystallisation of further personal pension benefits. However, with the lifetime allowance reducing to £1million, this would mean that you now only have 10% of £1million, therefore £100,000 available.

The potential impact of this being that a further £50,000 of your funds may be exposed to a tax charge of 55% which would equate to a reduction on your fund of £27,500.

If you find yourself in this position, I recommend that you reconsider crystallising any personal pension funds ahead of the reduction in the lifetime allowance at the start of the 2016/17 tax year.

Furthermore, crystallisation of personal pension benefits no longer impacts upon you with respect to the effectiveness of passing the funds down a generation for inheritance tax mitigation purposes.

£150,000 earnings threshold in relationship to the annual pension input allowance.
In the summer budget the Chancellor announced a ‘Tapered Annual Allowance’ in that anyone earning over £150,000 would start to see their annual pension input allowance reduced from £40,000 down to £10,000. This is effective from 6 April 2016.

The standard £40,000 annual pension allowance will be reduced by £1 for every £2 of income you have over £150,000 in the tax year until your allowance drops to £10,000. So if you have an income of £210,000 you would see your annual pension allowance cut by £30,000 (that is £60,000 excess income divided by 2). It is important to note that income is not just income earned from your business or employment but also rental income, building society interest, etc. and is before deduction of any pension contributions. Tax free income such as that generated from ISA’s is not included in the £150,000 figure.

If you would like to talk about the issues addressed here please contact Graham Walker on 01603 619620.
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