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Lifetime allowance tax charge - NHS Pension scheme members

By: Lovewell Blake Financial Planning Date: 8 January 2019
Category: Lovewell Blake Financial Planning

What is the Lifetime Allowance (LTA)?
As part of the Government’s Pension Simplification legislation, a pension fund threshold was introduced from April 2006. Over time, this threshold rose to £1.8 million but was subsequently reduced to £1 million. The LTA for the 2018/19 tax year stands at £1,030,000 and it will be increased by CPI for the 2019/2020 tax year.

Essentially, the LTA places a limit on the amount of pension benefit that can be drawn from pension schemes without paying additional taxation. The amount takes into account both lump sums and retirement income.

How do I calculate the value of my pension funds for LTA purposes?
For members of the 1995 section of the NHS Pension scheme, the income element of the retirement benefits is multiplied by a factor of 20, then the value of the tax free lump sum is added. The combined figure represents the capital value of these benefits, which is then tested against the LTA.

For members of the 2008/2015 sections, the income element is multiplied by a factor of 20. There is no automatic payment of a tax free lump sum. A tax free lump sum is available by commuting part of the retirement pension.
If an individual also has other pensions, the value of these schemes must also be taken into account, however the benefit and value of non-UK pensions and the state pension are excluded.

What tax do I pay if my retirement benefits exceed the LTA?
If retirement benefits are taken as an income a 25% tax charge is applied to the pension. If benefits are taken as a lump sum, a 55% tax charge is applied.

Example – 1995 section
Dr X has a pension of £49,500 per annum plus a tax free lump sum of £148,500. There are no other pension benefits, therefore the capital value is equal to £1,138,500.

This exceeds the 2018/19 LTA threshold by £108,500.

As benefits are being taken as an income a tax charge of 25% is applied to the amount over the LTA, equal to £27,125. Dr X has the option of paying this tax charge or requesting the NHS Pensions Agency pays it on their behalf.

If the member elects for the NHS Pensions Agency to settle their tax bill with HMRC, a debt will be applied to their pension.

The debt payment is calculated using an age related factor, details of which can be found on the NHS Pensions Agency website.

Using the above example and assuming Dr X was age 60 at the time they took their benefits, a factor of 20.60 would be used.

Therefore; £27,125 divided by 20.60 equals £1,316.74. which means Dr X’s starting pension would be
£48,183.26 per annum with a tax free lump sum of £148,500.

There are a number of strategies for mitigating the effects of the Lifetime Allowance. For further information please contact us.
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