+ Q & A – Pensions tax and retirement flexibilities

The recent announcements in the Budget regarding pensions tax and the outcome of the consultation into NHS retirement flexibilities have brought welcome news for many clients. However, these measures have added further complexity to already convoluted regulations and possibly created some confusion too. Here we present a round-up of some of the key issues.

Has the lifetime allowance been abolished?

At the lecturn on Budget day, Mr Hunt said he would ‘abolish the lifetime allowance altogether’. Actually, he has removed the tax charge of the lifetime allowance. This means that technically the lifetime allowance or LTA is still in place until April 2024 when it will then be eliminated completely.

Could the LTA be brought back by a subsequent government?

In the aftermath of the Budget announcements, Labour politicians expressed that should their party be elected in a general election, they would reinstate the LTA. The next general election is due to be called by January 2025.

While we cannot predict whether this would be actioned in reality, we are mindful of the confusion this might cause. If it was reinstated, further ‘protection’ schemes would likely be created to protect previous retirement values. Labour has also announced that should the LTA be reinstated, doctors could be exempt in the same way that judges are currently removed from the tax-free savings limits.

What is the new tax-free lump sum figure?

The tax-free lump sum figure or pension commencement lump sum (PCLS) is now capped at £268,275 (25 per cent of the previous lifetime allowance figure). Those who have previously applied for LTA protection can keep their higher tax-free cash amount.

This means that although you can now save more in your pension overall, you are still going to be taxed on drawing benefits over and above the PCLS cap.

Will former pension ‘protection schemes’ still be valid?

The finance bill published at the end of March set out key details about how the new lifetime allowance rules will operate going forwards.

Those with enhanced protection and fixed protection registered before 15 March 2023 can now pay in new contributions to their pensions and retain their existing protected tax-free cash entitlement. Formerly, both protection types were lost if benefits were accrued.

However, the maximum amount of tax-free cash someone with enhanced protection can take will be restricted to the amount they could take on April 5, 2023.

What is enhanced protection?

This protection scheme was available to individuals with any level of benefits at 5 April 2006 who registered before 5 April 2009. If the individual drew benefits, no lifetime allowance charges would arise, regardless of the size of the fund being crystallised.

From 2012/13 the pension commencement lump sum (PCLS or ‘tax-free cash’) for those with enhanced protection was limited to 25 per cent of £1.5m or the standard lifetime allowance, whichever is higher.

Protection holders could add lump sum protection too – if their lump sum pension rights were more than £375,000 at 5 April 2006. These rights can be found on the official protection certificate received when it was first registered.

What is fixed protection?

There are three types of fixed protection – each version was introduced to compensate for subsequent cuts to the lifetime allowance. They give different levels of protection but operate in the same way. There is no lump sum protection – the maximum tax-free cash amount is always 25 per cent of the sum protected.

Here is a summary of the various fixed protection schemes:

I opted out, should I start to contribute to the NHS pension again?

The removal of the lifetime allowance and easing of the annual allowance does not mean those that have been opted out of the pension for a reasonable period should automatically start contributing again. This is because inflationary increases, which will have been accrued at no cost as a deferred member, will be lost on re-entering the scheme. It is important to check your own particular position before taking action.

Will the annual allowance still be a problem?

The annual allowance has been increased from £40,000 to £60,000 which should mean the majority of clinicians can avoid excess tax on their pensions’ growth. The tapered version of the allowance which further penalises higher earners depending on income has been raised to £10,000 from the current £4,000 which is further good news.

You will also need to be earning more before qualifying for a tapered annual allowance. The ‘adjusted income threshold’ has increased from £240,000 to £260,000. Adjusted income includes your NHS pensions growth and any personal pensions, on top of your work earnings, investment dividends and buy to let income, for example.

Why are public sector pensions now ‘linked’?

The Budget papers confirmed that public sector pension schemes will be considered ‘linked’ for the purposes of annual allowance calculations which is a positive step. This means that negative pension growth in the 1995 section can be offset against positive growth in the 2015 scheme.

What is the difference between ‘retire and return’ and the new ‘retire and rejoin’?

If you have accrued benefits in the 1995 section, you can now ‘retire and rejoin’ which means you can retire, draw NHS pension benefits and rejoin the 2015 scheme to accrue further benefits. You can retain your current job role.

Previously, doctors could ‘retire and return’ but would not be guaranteed to return at the same status.

What is the new partial retirement option?

From October 2023, doctors can retain their current role (including the same terms and conditions of their contract) while accessing partial retirement. If you are age 55 and above, you can take up to 100 per cent of your pension benefits.

If you choose this option, you must reduce your pensionable pay by at least 10 per cent. New guidance has been promised as to how this might work in practice, but could include an option to make some PAs non-pensionable.