It seems even the brightest of us tend to file confusing tax bills in drawers for "later", fooling ourselves that the problem will go away. However, this can lead to unexpected tax bills thanks to pension rules that came into force in 2015.
At this time, the government decided that those earning in excess of an adjusted income of £150,000 a year would have their annual tax allowance cut by £1 for every £2 earned over the £150,000 limit. At £210,000 and above the tax-free allowance on pension contributions reduces to a flat £10,000 a year.
Adjusted Income is net income, plus employee contributions, plus the pensions input (the value of the increase in benefits calculated by the SPPA after the year-end), minus the cash value of the employee contributions. The problem for higher earners in the NHS is that pay is related to hours worked and it is very difficult to tell in advance what the year’s pension contributions are going to amount to. This means that precise contributions can only be arrived at retrospectively. When the sums are finally done, consultants frequently find themselves with large unexpected tax bills for past years’ work.
The BBC reported in July 2019 that waiting lists for routine surgeries in England had surged by up to 50% as senior doctors have started declining extra shifts to avoid nasty tax surprises. The problem for doctors is that all their income is considered in the annual allowance calculation, including private and non-pensionable work. Even doctors who earn only just above £110,000 could potentially face a tax charge.
Unfortunately, the accountants who act for medical consultants are prevented by law from providing financial advice. The accountant can confirm that they have a tax bill to pay, but he or she cannot tell them what to do about it. That is the job of a qualified financial adviser.
Another problem affecting NHS pensions for high earners is that the whole NHS pension scheme is an unfunded scheme. This means that benefits being paid to those in retirement all come out of present contributions by employers and scheme members. If the numbers of consultants paying into an NHS Trust’s scheme dwindle, the government must raise the pension contribution perhaps from both employer and employee. One solution could be for those in their 50s to opt to come out of the NHS pension scheme, but that requires very detailed planning and specialist financial advice suited to the individual.
It pays to invest in the future… now
The NHS has had two Pension Schemes, the 1995 and 2008 scheme and the 2015 scheme. The 2015 scheme uses a different formula based on career average earnings. A result of this is many senior medical staff are trapped in a “twilight zone” between schemes.
Benefits will have built up in the older schemes which can be taken at age 60. From 2015, or later, however, consultants and doctors may also be members of the new scheme which accrues benefits more quickly but cannot normally be accessed until age 67. One of the solutions available to this tax dilemma, could be to continue to pay into the new scheme (if Annual Allowance limits permit!) and for the member to opt to take the new (age 67 scheme) benefits early. This will incur a penalty but can – if the calculations are done properly - reduce the pot below the Lifetime Allowance tax level.
Finding the sweet spot of retirement between benefits at age 60 and 67, can be attained by careful planning and use of the Annual Allowance and Lifetime Allowance limits. It is important to realise that people on similar salaries may not have the same retirement, family or investment goals, so individual advice is critical.
Situations can differ greatly due to age, marital status and whether there is a desire to work on or retire. However, there are alternative vehicles which can be used to build up benefits. However, potential investors need to be properly advised with an expert recommendation.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.