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 richard.higgs@wealthwestmedical.co.uk or 0117 966 599.

More News
Can doctors trust the rising market? Monday, July 23, 2018
Quote Mark
  • "We have been very impressed with the personal service, attention to detail and comprehensive evaluation of our financial circumstances. We would certainly appreciate ongoing help and support from Richard over the future." Jason Kendall (Consultant in Accident and Emergency), Southmead Hospital
  • "Richard provides a very convenient and personal service. Richard has good knowledge and has the ability to go through reasoning for any recommendations." Tim Mitchell (GP), Montpelier Health Centre
  • "Richard provides an excellent service, prompt and flexible. Although the level of technical knowledge is impressive, answers to our questions are presented in a straightforward manner, without overwhelming us with information." Mary Gainsborough (Consultant in Paediatrics), Southmead Hospital
  • "Richard gives me an excellent personal service in my own home. His advice and explanations have been excellent. Richard also has excellent technical knowledge – who wouldn’t be happy?" Charles Record (GP), Frome Valley Medical Centre
  • "Richard provides an excellent, personal service. He responds very quickly and attentively to queries and very much keeps me up to date with important matters that affect me - such as the latest changes to pensions, investments and taxation. Recommendations are delivered in a timely, effective manner - usually face to face in my own home." Professor Gianni Angelini (Head of Cardiothoracic Surgery), BRI
  • "It is very convenient for me to be seen at home and Richard is very flexible with timings - especially when unexpected things crop up at the hospital. Meetings are friendly and relaxed with my long-term best interests very much at the heart of discussions." Professor Gianni Angelini (Head of Cardiothoracic Surgery), BRI
  • "We have found it far more reassuring having a local adviser rather than a national firm. We have found the service excellent and Richard answers all the questions we want answering. Richard's technical knowledge is excellent, he has detailed knowledge of pensions." Paul Male and Helen Lewis (GPs), Thornbury Health Centre
  • "The personal touch counts for a lot and the willingness to visit us at home is much appreciated. Richard provides an excellent, friendly, accessible service, not encumbered by jargon or salesmanship." Professor Peter Mathieson (Honorary Professor of Medicine), University of Bristol
  • "I can recommend Richard as providing measured, balanced independent financial advice. He listens very carefully and tailors advice appropriately in a knowledge-based manner. He is very accessible and gives his clients time and clarity in order to make the most sensible decisions for themselves based on the available facts." Andrew Medford (Consultant in Respiratory Medicine), Southmead Hospital
  • "Richard now knows me and understands my financial position. I have complete trust in his advice. The level of service I have experienced is second to none. We have received regular reviews in our own home, speedy and thorough advice to any queries." John Rees (General Practitioner, Specialist in Urology ), Blackwell and Nailsea Medical Group
  • "The advice I have received has dramatically altered my personal protection policies for the better and reduced my personal tax liability." John Rees (General Practitioner, Specialist in Urology ), Blackwell and Nailsea Medical Group
  • "I appreciate Richard's local knowledge and the fact that he is in contact with a lot of local general practitioners which is useful for networking. He is also very knowledgeable about the different pension schemes and their pros and cons." Fiona Hayes (General Practitioner) Bristol University Student Services
  • "I have enjoyed the process of dealing with a local advisor and it has not felt like a box ticking exercise. The service has been excellent. The great flexibility to come to my home at a time suitable to my working day has set this company apart from others I have dealt with in the past. The technical knowledge provided has been expertly tailored to my requirements and financial situation. The manner in which it has been delivered has also been first rate. " Beth Harrison (General Practitioner) Montpellier Health Centre
  • "We have regular meetings with the same adviser who knows our profile and keeps our requirements in mind with the plans he makes. The reviews are simple to organise and are always at a convenient time and location." Mike Bould (Orthopaedic Surgeon) Western General Hospital
  • "The service I have received from Wealth West is excellent! they are more personable and accessible than large firms and are not pushy at all. They also have a very good breadth and depth of knowledge." Billy and Annie Headdon (Anaesthetics and Intensive Care Trainee, General Practitioner) Montpelier Health Centre
  • "My experience of the service has been excellent. I have been able to ask many questions and have received excellent advice on my financial situation. The technical knowledge of Wealth West Medical is excellent. Anyone who can help my investments grow in the current environment clearly knows what they are doing. I would highly recommend Richard and Wealth West Medical." Linda Buczek (General Practice Manager) Bishopston Medical Practice
  • "The technical knowledge of Wealth West Medical is very good. Richard keeps up to date with the changes to the NHS pension scheme and new legislation." Melanie Lockett (Consultant) Southmead Hospital
  • "Wealth West Medical offers a friendly, helpful and efficient service. Richard keeps in touch at regular intervals and has a very good knowledge of pensions and investments." Rachel Brown (General Practitioner) Montpelier Health Centre
  • "Richard comes to my house for meetings and it is nice to see a familiar face. He remembers my details, and advises over the long term. Richard has a detailed understanding of my particular pension plan and has explained this very clearly to me. He has also helped me to manage tax payments for annual allowance and pension protection." Hugh Herzig (Consultant Psychiatrist) Southmead Hospital
  • .