Lifetime Allowance Charge – what it is, when it applies and how it’s paid
Doctors have had to become increasingly familiar with the Lifetime Allowance for pensions. This allowance has rapidly reduced over the last few years from a high of £1.8 million in 2011/12 to the £1,000,000 it stands at now (rising to £1,030,000 in April 2018). At this lower level far more doctors are affected.
Doctors with an NHS Pension value of more than £43,378.26 a year will breach the current Lifetime Allowance of £1 million. This assumes they have no other pensions. Doctors who also have other pensions, including AVCs, personal pensions/SIPPs or pensions from other employments, will reach the Lifetime Allowance sooner.
Any excess over the Lifetime Allowance is subject to a Lifetime Allowance Charge. This charge applies at the point that benefits are taken. For doctors with an NHS Pension this is when you retire and start taking your pension income, or in the event of death before retirement when the death benefits are paid out.
The Lifetime Allowance Charge is 55% if the excess is taken as a lump sum or 25% if taken as taxable income. If your NHS Pension exceeds the Lifetime Allowance at the time you retire the Scheme will apply the Lifetime Allowance Charge at 25%. They will pay this directly to HMRC then recover it over your lifetime by reducing your annual pension.
If you have other pensions as well, the order in which you take them will affect your Lifetime Allowance Charge. Say, for example, your NHS Pension is worth £900,000 for Lifetime Allowance purposes (this equates to a pension value of £39,130.43 a year) and you also have a personal pension worth £300,000. If you take the NHS Pension first there will be no Lifetime Allowance Charge so your NHS Pension income will not be reduced. When you later take the personal pension, you must tell the personal pension provider you have already used 90% of your Lifetime Allowance (the £900,000 used up by the NHS Pension). Assuming you take the personal pension in full and the Lifetime Allowance is still £1,000,000, you will breach the Lifetime Allowance by £200,000 (£900,000 + £300,000 = £1,200,000). If you decide to take the excess as a lump sum the personal pension provider will pay it out to you after the deduction of a 55% Lifetime Allowance Charge so you will receive £90,000. There will be no further tax to pay. If you decide to take it as income, the personal pension provider will deduct a Lifetime Allowance Charge of 25% from your income payments. You will then also have to pay income tax on these payments.
If instead you take the personal pension first there will be no Lifetime Allowance Charge when you take your personal pension benefits. When you retire from the NHS you must tell NHS Pensions that you have already used 30% of your Lifetime Allowance (the £300,000 used up by the personal pension). Assuming the Lifetime Allowance is still £1,000,000, there will be a £200,000 excess when you take your NHS Pension (£300,000 + £900,000 = £1,200,000). NHS Pensions will pay the £50,000 (25%) Lifetime Allowance Charge and reduce your annual pension accordingly.
Because the Lifetime Allowance Charge is paid on retirement, doctors who are continuing members of the NHS Pension scheme won’t have a Lifetime Allowance Charge to pay right now but might be building up to one in the future. This doesn’t, however, mean there is nothing to be done. Lifetime Allowance planning can include looking at when and in which order to take your pensions, reviewing the level of contributions being made to any pensions outside the NHS Pension and the investments held within these (including Additional Voluntary Contributions or AVCs) and considering the use of alternative tax-efficient investments to save for retirement.
Please note tax rules and allowances are subject to change by the government. This article does not constitute personalised advice. If you require advice on Lifetime Allowance planning please contact Richard Higgs CFP FPFS on firstname.lastname@example.org or 0117 966 599.