Plymouth - NHS Pension Changes - Where do you stand?

NHS Pension Scheme

8th July 2015

Luke Bennett Richard Wright

www.francisclark.co.uk

Speakers

Luke Bennett

Chartered Accountant and Chartered Tax Advisor

Healthcare partner for Francis Clark LLP

Based in Truro, Cornwall

Act for 50 GP Practices

Director of aisma


Speakers

Richard Wright

Consultant

Francis Clark Financial Planning

Based in Plymouth


Programme

1. 1995/2008 and 2015 Schemes

2. Pension flexibilities

3. Annual allowance and Scheme Pays

4. Lifetime allowance

5. Protections available for lifetime allowance

6. Interaction with personal pension funds

7. Decisions, decisions

8. Q&A


1995/2008 and 2015 Scheme

Officers

1995 2008 2015

Contribution rate Employee 5% to 14.5% of pensionable pay + Employer 14.3%

Pension 1/80th of final year’s salary per year of

membership

1/60th of final year’s salary per year of

membership

1/54th (1.852%) of career average revalued earnings (CARE)

Automatic lump sum 3 x pension None None

Abatement of pension for lump sum

Option to exchange £1 pension for £12 lump sum up to a maximum of 25% of the capital value

Normal pension age 60 65 State Pension Age


1995/2008 and 2015 Scheme

Practitioners

1995 2008 2015

Contribution rate Employee 5% to 14.5% of pensionable pay + Employer 14.3%

Pension 1.4% of career average revalued earnings

(CARE)

1.87% of career average revalued earnings (CARE)

1/54th (1.852%) of career average revalued earnings (CARE)

Automatic lump sum 3 x pension None None

Abatement of pension for lump sum

Option to exchange £1 pension for £12 lump sum up to a maximum of 25% of the capital value

Normal pension age 60 65 State Pension Age


1995/2008 and 2015 Schemes

• Joined NHS scheme before 1 April 2008 – 1995 Scheme

• Joined NHS scheme before 1 April 2015 – 2008 Scheme

• Some members of 1995 Scheme chose to switch to 2008 Scheme

• On 1 April 2015 all existing members of 1995 & 2008 Schemes join 2015 scheme except for:

• Those within 10 years of normal pension age at 1 April 2012 – full protection

• Those more than 10 years but less than 13 years 5 months of normal pension age at 1 April 2013 – tapered protection


1995/2008 and 2015 Schemes

• Pre 01/04/15 members will continue to have benefits in two schemes

• 1995/2008 benefits can be claimed at 60/65 by taking 24 hour retirement

• Or earlier with reduction for early payment

• 1995 members can’t build up further rights in 2015 scheme

• 2008 members can build up further rights in 2015 scheme

• 2015 benefits

• Take at same time as 1995/2008 benefits with reduction for early payment

• Take at State Pension Age without reduction

• Any time between the tow

• Or, after State Pension Age with addition for late retirement

• Added years benefits can be taken separately from 1995/2008 benefits


2008 & 2015 Scheme

Partial retirement

• Optional flexibility for member between 55 and 75

• GPs – “engagement in business” reduced by at least 10%

• Claim between 20% and 80% of full pension

• Can claim partial retirement twice


Pension flexibilities

• Officer posts – not a practitioner post

• Practitioner post – GP partner, salaried GP, locum GP

• GP can hold both officer and practitioner posts at same time (e.g. CCG salaried board member)

• NHS Pensions will use most favourable method to calculate pension

• Separate Officer and Practitioner pension

• Practitioner pension that takes account of Officer membership (most common)

• Practitioner pension that includes some Officer membership and separate Officer pension for remaining Officer membership



Example 1:

• Dr Trott with 8 years hospital service – final salary £40,000

• Followed by 26 years as GP – CARE £2.5 million

• Member of 1995 Scheme

Separate officer and practitioner pension£

Officer £40,000 x 8 / 80ths 4,000 Practitioner £2.5 million x 1.4% 35,000

39,000

Practitioner pension that takes account of officer membership

Practitioner £2.5 million x 1.4% x 34 years / 26 years 45,769



Example 2:

• Dr Trott takes up CCG post for 2 days per week – full-time equivalent salary of £120,000

• CARE has grown from £2.5 million to £2.7 million

Practitioner pension that includes some Officer membership andseparate Officer pension for remaining Officer membership

£Officer (CCG) £120,000 x 0.4 / 80ths 600 Practitioner £2.7 million x 1.4% x 35 years / 27 years 49,000

49,600

Practitioner pension that takes account of officer membership£

Practitioner £2.748 million x 1.4% x 35 years / 27 years 49,871

Separate officer and practitioner pension£

Officer £120,000 x 8.4 / 80ths 12,600 Practitioner £2.7 million x 1.4% 37,800

50,400


Annual allowance and Scheme Pays

Example 3:

• Dr Trott annual allowance calculation for 2014/15

• Assume no unused relief from previous three years

• Annual allowance for 2014/15 is £40,000

• Annual allowance excess £64,510 - £40,000 = £24,510

• Assume 40% tax rate

• Annual allowance tax charge £24,510 x 40% = £9,804

Date Pension X 19 = capital value

Revaluation Growth

31 March 2014 £45,769 £869,611 + 2.7% £893,090

31 March 2015 £50,400 £957,600 £957,600

£64,510


Annual allowance and Scheme Pays

• A “Scheme Pays” option is available if the tax charge is in excess of £2,000

• Election required

• Reduction in pension based on tax paid plus interest (at CPI + 3%)

• Factor based on age / gender when pension drawn

Example 4

• Dr Trott has annual allowance tax charge of £9,804

• At time of retirement including interest, charge has increased to £10,800

• Male age 60 – factor 21.6

• Reduction in pension = £500 (£300 after tax)

• Reduction in lump sum = £1,500


Annual allowance

Interaction between CPI uplift and dynamisation

Dynamisation is CPI + 1.5% but years are out of sync

Year CPI Dynamisation Difference

2008/09 1.8% 6.5% 4.7%

2009/10 5.2% 1.5% -3.7%

2010/11 1.1% 4.6% 3.5%

2011/12 3.1% 6.7% 3.6%

2012/13 5.2% 3.7% -1.5%

2013/14 2.2% 4.2% 2.0%

2014/15 2.7% 2.7% 0.0%

2015/16 1.2% ? ?


Lifetime allowance

• Tax charge of 25% of excess over lifetime allowance

• Collected by assuming you will draw pension for 20 years

• Capital value = 20 x pension + lump sum


Lifetime allowance

Example 5

• Dr Trott decides to retire age 59

• Pension of £52,000 and lump sum of £156,000

• After early retirement factors

• Pension £52,000 x 0.953 = £49,556

• Lump sum £156,000 x 0.970 = £151,320

• Capital value

• £49,556 x 20 + £151,320 = £1,142,440

• Excess over lifetime allowance of £1 million = £142,440

• Reduction in pension £142,440 x 25% / 20 = £1,781

• Actual pension: £49,556 - £1,781 = £47,775


Lifetime allowance

Abating pension for lump sum reduces lifetime allowance charge

• Excess over lifetime allowance of £1 million = £65,704

• Reduction in pension £65,704 x 25% / 20 = £821

• Actual pension: £39,964 - £821 = £39,143

• Pension without abatement after LTA charge was £47,775

• Real reduction in pension is £8,632 for £115,104 lump sum (1 for 13.33)

Pension Lump Sum Capital value£ £ £

Before abatement 49,556 151,320 1,142,440 Abatement (9,592) 115,104 After abatement 39,964 266,424 1,065,704


Lifetime allowance - protection

Individual protection 2014

• Capital value of all pension plans at 5 April 2014 (assuming normal retirement age)

• If this is greater than £1.25 million, lifetime allowance will be lower of:

• Capital value of all pension plans at 5 April 2014; and

• £1.5 million

• No downsides to individual protection

• Election must be made by 5 April 2017

• NHS Pensions won’t accept valuation requests from GPs before May 2016 unless retirement is before that date

Individual protection 2016

• Expected to work in same way but based on value at 5 April 2016 and between £1 million and £1.25 million


Lifetime allowance - protection

Fixed protection 2014

• Fixed lifetime allowance at £1.5 million.

• Election had to be made by 5 April 2014

• Benefit of fixed protection can be lost if any contributions to pension scheme after 5 April 2014 – beware auto enrolment

Fixed protection 2016

• Expected to work in same way but will fix lifetime allowance at £1.25 million

• Election to be made before 5 April 2016?


Personal pension plans

Annual allowance

• Contributions to personal pension plans use up part of annual allowance

• Unlikely to be beneficial to contribute to personal pension plan if NHS pension uses up annual allowance

Lifetime allowance

• Value of fund at drawdown will use up part of lifetime allowance

• Is it better to crystallise personal pension plan before or after NHS pension?


Personal pension plansExample 6

Dr Trott entitled to NHS pension of £52,000 and lump sum of £156,000

This has a capital value of £1,196,000

He has a personal pension plan worth £50,000

Assume lifetime allowance is £1,000,000

If he draws NHS pension firstExcess over lifetime allowance is £196,000Reduction in pension is £2,450Pension after lifetime allowance charge is £49,550 (£52,000 - £2,450)

25% tax charge applied to whole of personal pension fund as lifetime allowance used up.Value of personal pension fund reduced from £50,000 to £37,500.

If he draws personal pension first£50,000 of lifetime allowance used up out of £1 million - no tax at this stage

Excess over lifetime allowance is £246,000Reduction in pension is £3,075Pension after lifetime allowance charge is £48,925 (£52,000 - £3,075)


Decisions, decisions

• How much income do I need in retirement?

• How large a lump sum do I want?

• Am I better off:

• Continuing to contribute and accepting annual and lifetime tax charges;

• Reducing hours and pensionable pay

• Stopping added years contributions but remaining a member of the scheme;

• Taking 24 hour retirement and drawing lump sum and pension before 60;

• Ceasing contributions and becoming a deferred member (watch loss of other benefits);


Q&A

Questions?

And hopefully Answers!

Topics not covered

• Additional pension

• Early retirement reduction buy out (ERRBO)

Luke [email protected]

Richard [email protected]


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Plymouth - NHS Pension Changes - Where do you stand?