We are aware that some may be considering temporarily opting out of the pension scheme to avoid further pension input through the remainder of the pension year, however extreme care must be taken before making such a decision.
This approach may not necessarily reduce 21/22 pensionable earnings if your accounting year does not end on 31 March. For example, if your accounting year end is 30/6/21 and you opt out 30/11/21, your 21/22 pensionable earnings will include the additional 5 months which could be more than the historical overlap being deducted.
Opting out of the NHS Pension Scheme could lead to the following:
· A reduction in future benefit accrual meaning that your NHS Pension Scheme benefits may not provide enough for your retirement
· A reduced annual increase in benefits through the loss of the additional 1.5% dynamisation
· An increase in taxable income above the £200,000 threshold, due to less pension tax relief, which would result in tapering of the £40,000 annual allowance and inadvertently increasing the annual allowance charge
· Reduction in the ill-health pension benefits you may be entitled to through the scheme
· Reduction in the amount of lump sum on death your family would receive
We strongly recommend that you review the following information from the NHS Pension Scheme website to understand more about the impact of opting out, further information can be found here.
Opting out of the scheme does not guarantee that you will avoid a pension input tax charge. Whether you choose to opt-out, or remain in the scheme, if you should incur a pension input tax charge, this will need to be declared on your tax-return. You can choose to pay the charge directly to HMRC, or you may be able to ask the NHS to pay this (possibly in full, or in part) on your behalf through a ‘Scheme Pays’ election.
Under the terms of a Scheme Pays election, the amount of tax charge you have asked the NHS to pay to HMRC on your behalf will be recorded against your membership. Each year interest will be added to this amount until you retire. The current rate of interest applicable is 2.4% in excess of inflation (effectively 5.5% taking the September CPI figure of 3.1%).
At retirement, the total amount of tax charges paid to HMRC, plus interest, is calculated and applied as a reduction to your retirement benefits. The level of reduction applied will vary depending on the total amount to be recovered, the age at which you retire, and which section of the scheme the deduction applies to. It is important to keep in mind that this is a permanent reduction to your benefits.
Whilst it may not be practical or possible to pay a pension input tax charge yourself, if it is an option for you it could provide a more beneficial approach in the long-term, by avoiding the interest that is applied to a Scheme Pays election, and the eventual reduction in your pension benefits.
Further information regarding the NHS Scheme Pays facility is available here.
It is important to consider your options carefully and to try and balance your current and future needs. As always, our specialist healthcare accountancy team, and financial planning advisers, are available if you would like to discuss your options further.