How Scheme Pays Works If You Exceed The Annual Allowance
Doctors are often concerned about their pension savings exceeding the standard Annual Allowance, as an Annual Allowance charge is payable at the their marginal rate(s) of income tax (i.e. 20%, 40% and 45%) on the excess.
Ultimately you are responsible for paying your Annual Allowance charge to HMRC via a self assessment tax return. But did you know you may be able to elect for NHS Pensions to pay some or all of your Annual Allowance charge for you, from the 1995/2008 NHS Pension Scheme and/or the 2015 NHS Pension Scheme?
The Scheme will pay the charge if they receive a Scheme Pays election within HMRC deadlines and where mandatory conditions are met:
It is important to understand the deadline(s) for a Scheme Pays election
If you meet the mandatory conditions and you would like the Scheme to pay some or all of your Annual Allowance charge then the Scheme must receive your completed Scheme Pays election notice on or before 31 July, following the January in which the Annual Allowance charge must be declared on your tax return.
For example, for tax year 2017/18, NHS Pensions must receive your election by 31 July 2019.
In addition, you must complete and send the election before your NHS benefits crystallise when you expect to retire, and the election must be completed and received by the Scheme before your 75th birthday when you reach age 75.
The Scheme does not have to pay an Annual Allowance charge if:
The Scheme can ask HMRC for a discharge from paying the Annual Allowance charge even where mandatory conditions are met. For example, if you have insufficient scheme benefits from which to recover the Annual Allowance charge. This may be an issue for doctors with a large pension share debit on their NHS benefits because of divorce or dissolution of a civil partnership, or if you die in between the Scheme receiving the election notice and paying the Annual Allowance charge to HMRC. If a discharge is granted by HMRC you or your estate will be liable for paying the charge.
How does the Scheme recover the Annual Allowance charge?
Unfortunately, the Scheme paying your Annual Allowance charge isn’t an act of kindness. The Scheme will recover the cost of paying your Annual Allowance charge by reducing your NHS Pension benefits when they are paid to you.
In basic terms, the arrangement is similar to NHS Pensions ‘loaning’ you money now to pay your tax bill which you have to pay back with interest at a future date, when you either retire or transfer out.
At your retirement the total balance owing, including all relevant interest, will be converted into an amount to be permanently deducted from your NHS benefits.
In the event of your death, dependant’s benefits will be based on your benefits before any recovery for Scheme Pays. Effectively if you were to die before retirement the total balance owing will be written off.
If you leave and transfer your NHS Pension to another registered pension scheme, the transfer value is reduced to recover the total balance owing.
How does Scheme Pays affect the Lifetime Allowance?
When NHS Pension benefits are reduced because of Scheme Pays the capital value of the reduced benefits are tested against the Lifetime Allowance at retirement.
Likewise, if transferring pension benefits to an overseas pension scheme it is the reduced transfer value that is tested against the Lifetime Allowance.
NHS Money Purchase AVC Scheme
Some doctors also contribute to the NHS Money Purchase AVC (MPAVC) Scheme. The MPAVC Scheme is registered separately with HMRC. Doctors who have paid contributions into this scheme that exceed the standard Annual Allowance may have an Annual Allowance charge. The Scheme will reject any request for Scheme Pays for either the 1995/2008 Scheme or 2015 Scheme to pay any Annual Allowance charge in respect of the MPAVC Scheme.
Reporting the Scheme Pays to HMRC
Members must still tell HMRC about their Annual Allowance charge on their tax return and confirm they have elected for Scheme Pays.
Please note this article does not constitute personal financial advice. If you require further help regarding your pensions and retirement planning, Richard Higgs, Chartered Financial Planner and NHS Pension specialist, can be contacted on 0117 966 5699 or at firstname.lastname@example.org.