The Medical Money e-guide to the NHS Pension Scheme for Dentists. feel better advised

Transcription

1 The Medical Money e-guide to the NHS Pension Scheme for Dentists

2 Dentists INTRODUCTION Medical Money Management (MMM) has specialised in providing healthcare professionals with relevant and up to date independent financial advice for over 40 years. Following George Osborne s Autumn Statement in December 2012, we have updated our NHS PENSION SCHEME Guide for Dental Practitioners to take account of the changes. The Guide covers the Retirement Benefits and the calculation thereof; however, it does not cover Ill Health Retirement, Death in Service or Widow(er) s benefits. Information on these sections will be covered in future guides. This content is based on our understanding of the Scheme and the information available as at 01 September The 1995 scheme The 1995 version of the NHS Pension Scheme (NHSPS) was the standard version for all Scheme members whose employment commenced before 01 April Members of the 1995 scheme have a Normal Retirement Age (NRA) of 60. The pension is calculated as 1.4% of total pensionable pay. The pension is calculated as follows: Pension = total pensionable pay* x 1.4% * The total pensionable pay is calculated by uprating each year s pay to values current at the end of the practitioner membership using dynamising factors for the year of retirement. The basic practitioner pension is 1.4% of this amount. The dynamising factors that are applied to each year s income are the CPI rate, determined in the preceding October, plus 1.5%. The rate for 2013/14 is 3.7%, being the CPI of 2.2% (taken from October 2012) + 1.5%. A full listing of CPI rates for each year can be found at A retirement lump sum, known as Pension Commencement Lump Sum (PCLS), is also paid. This is currently free of tax and is normally calculated as follows: PCLS = 3 x Pension EXAMPLE Tony, a 60 year old Dentist is about to retire. He qualified at age 23 and bought his own dental practice at age 30. His income in his first year in practice in 1982 was 11,018. When this income is dynamised using the 2012/13 figures, it equates to a reckonable income of around 51,609 in today s terms.

3 At the age of 44, Tony s income was around 55,049, equating to 100,851 after dynamising. This dynamising calculation is applied to each of Tony s historic pensionable incomes throughout his time in General Practice, summarised in the table below: Year Age Actual Income Dynamised Income ,000 38, ,500 70, ,250 75, ,869 61, ,534 56, ,249 50, ,018 51, ,000 88, ,500 89, ,113 90, ,846 90, ,709 91, ,713 90, ,866 90, ,181 89, ,670 89, ,345 86, ,221 83, ,312 88, ,636 92, ,208 97, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,026 Total Pensionable Pay 3,599,135 Career Average Revalued Earnings 94,714

4 Tony s total pensionable pay after dynamising is 3,599,135. Although his final income is around 123,000, the Career Average Revalued Earnings, upon which his pension is based, is 94,714. As a quick calculation, the pension could be calculated in the following way: Pension = total pensionable pay x 1.4% (i.e. 3,599,135 x 1.4%) = 50,388 p.a. PCLS = 3 x pension (i.e. 3 x 50,388) = 151,164. Tony can opt to forgo elements of pension to obtain an extra PCLS, within Her Majesty s Revenue & Customs (HMRC) limits. The maximum PCLS he may be able to take is 25% of the capital value of his NHS Pension. For every 1.00 of pension lost, he can gain of PCLS. Therefore, Tony s maximum PCLS would be 269,928, but this would reduce the pension to 40,511 (source NHS Pensions Website Pension Commutation Calculator. ) EARLY RETIREMENT (1995 scheme) It is possible to take benefits earlier than NRA; however, a penalty would apply. This is simply because the member would have accrued less service, contributed less and would receive the pension for longer. As a general guide, pension benefits are reduced by approximately 5% for each year that a member takes their NHS Pension early. EXAMPLE Tony would only have 34 years service to age 57 rather than 37 years to age 60 if he decided to retire three years earlier than his NRA. In this situation his pension would be reduced by around 14% and his PCLS, 9%. As a quick calculation, the reduced pension and PCLS could be calculated in the following way: Pension = (total pensionable pay x 1.4%) early retirement penalty ( 3,231,136 x 1.4%) 14% = 38,903 p.a. PCLS = 3 x (total pensionable pay x 1.4%) early retirement penalty 3 x ( 3,231,136 x 1.4%) 9% = 123,494. It is important to note that there are restrictions as to the value of overall pension benefits available and you are recommended to seek Independent Financial Advice with particular reference to the Annual and Lifetime Allowances, referred to later in this publication.

5 The 2008 scheme The 2008 version of NHSPS is the standard version for all scheme members whose employment commenced after 01 April Some members were offered the chance to transfer from the 1995 scheme into the 2008 scheme VERY few members took up this offer. Members of the 2008 scheme have an NRA of 65. The pension is calculated as 1.87% of total pensionable pay. There is no automatic entitlement to a PCLS; however, members do have the choice of taking an increased retirement PCLS by reducing their annual pension. The pension is calculated as follows: Pension = total pensionable pay* x 1.87% * The total pensionable pay is calculated by uprating each year s pay to values current at the end of the practitioner membership using dynamising factors for the year of retirement. The basic practitioner pension is 1.4% of this amount. The dynamising factors that are applied to each year s income are the CPI rate, determined in the preceding October, plus 1.5%. The rate for 2013/14 is 3.7%, being the CPI of 2.2% (taken from October 2012) + 1.5%. A full listing of CPI rates for each year can be found at EXAMPLE Simon is a member of the 2008 scheme plans to retire at age 65. He qualified at the age of 24 and bought his own practice at the age of 32. Year Age Actual Income Dynamised Income ,500 39, ,000 72, ,500 75, ,050 76, ,655 63, ,321 68, ,053 73, ,858 61, , , ,275 90, ,646 92, ,119 93, ,703 94, ,406 95, ,236 95, ,204 96, ,319 95, ,593 95, ,038 94, ,665 94, ,490 91, ,527 88, ,792 93,788

6 Year Age Actual Income Dynamised Income ,301 97, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,909 Total Pensionable Pay 4,187,007 Career Average Revalued Earnings 99,691 Simon s total pensionable pay after dynamising is 4,187,007. Although his final income is around 130,000, the Career Average Revalued Earnings, upon which his pension is based, is 99,691. As a quick calculation, the pension and PCLS could be calculated in the following way: Pension = total pensionable pay x 1.87% (i.e. 4,187,007 x 1.87% = 78, p.a. PCLS = there is no automatic PCLS. Simon can opt to forgo elements of pension to obtain an extra PCLS within HMRC limits. The maximum PCLS he may be able to take is 25% of the capital value of his NHS Pension. For every 1 of pension lost, he can gain 12 of PCLS. Therefore, Simon s maximum PCLS would be 335,556, but this would reduce the pension to 50,334. (Source NHS Pensions Website Pension Commutation Calculator. ) EARLY RETIREMENT (2008 scheme) It is possible to take benefits earlier than NRA; however, a penalty would apply. This is simply because the member would have accrued less service, contributed less and would receive the pension for longer. As a general guide, pension benefits are reduced by approximately 5% for each year that a member takes their NHS Pension early.

7 For example, Simon wants to retire three years early at age 62. He would only have 38 years service to age 62, rather than 41 years to age 65, so his pension would be reduced by around 15%. As a quick calculation, the reduced pension could be calculated in the following way: Pension = (total pensionable pay x 1.87%) early retirement penalty ( 3,798,418 x 1.87%) 15% = 60,376 p.a. Medical Money Management s view: If you want to retire before your normal retirement age, please consult your professional adviser. You are likely to face a significant shortfall in your pension income and careful planning, including the use of both pension and non-pension investments, is required to reduce the financial effect on your lifestyle. THE PROPOSED 2015 CHANGES It is now widely known amongst NHS Staff that the Government is making a series of changes to the Scheme affecting all members, particularly those under the age of 50. The changes are summarised in the table below: The biggest change is the move from a NRA (i.e. 60 on the 1995 scheme and 65 on the 2008 scheme) to be in line with the SPA. The Government has said that the scheme will be protected from further change for 25 years; however, if the SPA is extended again this may be carried through into the scheme. A summary of the current SPAs is as follows: 1995 scheme 2008 scheme 2015 scheme Pension 1.4% x total 1.87% x total n/54 x average Up to April 2015 pensionable pay pensionable pay revalued earnings PCLS 3 x Pension No automatic No automatic PCLS PCLS NRA In line with State Pension Age (SPA) Men born before 06 December 1953 retain their SPA of 65. Women born before 06 April 1950 retain their SPA of 60. Women born on or after 06 April 1950 but before 06 December 1953 will have an SPA between 60 and 65. Men and women born on or after 06 December 1953 but before 06 October 1954 will have an SPA between 65 and 66. Men and women born on or after 06 October 1954 but before 06 April 1968 will have an SPA of 66. SPA increases from 66 to 67 will affect men and women born on or after 06 April SPA increases from 67 to 68 will affect men and women born on or after 06 April 1978.

8 It has been rumoured that members will be forced to work to age 68; this certainly is not the case. You can still take NHSPS benefits from age 50 (for 1995 scheme members) or 55 (for 2008 scheme members), but early retirement penalties will apply. EXAMPLE To illustrate the implications of these changes, let s take a look at Carmel who is a member of the 1995 scheme. For simplicity, we will not take into account the effects of inflation or increasing income. In other words, the figures will be in today s terms. Carmel was 45 years old in 2013, with pensionable profits of 103,891. Her total pensionable pay to date is 2,153,890. Carmel s SPA will be 66. The NHSPS benefits that Carmel accrues up to April 2015 will be ring-fenced, so will be available at age 60 with no penalty. To April 2015, Carmel will have accrued 24 years service, and therefore total pensionable pay is 2,361,622 from which her accrued pension benefits would be 33,062 plus 99,188 as a PCLS. This is available to Carmel from age 60 without penalty. Carmel will be able to split her 1995 and 2015 pension benefits, so her 1995 benefits will be available at age 60, and she can defer taking her 2015 benefits. However, Carmel must be aware that she will no longer be an active member of the 2015 scheme while she is in receipt of benefits from the 1995 scheme. From April 2015, through to her SPA of 66 (a period of 18 years), if we assume that her average income to date remains constant, she should accrue benefits under the 2015 Scheme, thus: Pension = ( 99,691 / 54) x 18 = 33,230 p.a. So, at age 66, she has total pension entitlement of 66,292 p.a., plus a PCLS of 99,188. However, Carmel is adamant that she wants to retire at age 60. This is allowed. Her 1995 benefits will remain unchanged, but her 2015 benefits will reduce - SIGNIFICANTLY. The official early retirement penalties for the 2015 scheme have not been published, but we understand that they are unlikely to change very much from the current penalties. At age 60, Carmel will be taking her 2015 benefits 6 years early. On the 2008 scheme, benefits are reduced by 27%. If the same penalty is applied to the 2015 benefits, at 60, Carmel might receive: Pension = (((99,691 /54) x 12) 27%) + 33,062 = 43,934 p.a. PCLS = 99,188. In other words, Carmel would see an overall reduction in her pension benefits of approximately 21%, compared with what she would have received at age 60, had the 1995 scheme remained in place. Medical Money Management s view: The younger you are, the greater the effect of the 2015 changes. To minimise the effects, it is important to start planning early. It may be better to use non-pension investments to bridge the gap between 60 and your SPA instead of taking a reduced pension.

9 TRANSITIONAL ARRANGEMENTS All members who are within 10 years of their current NRA on 01 April 2012 will retain their current pension arrangements. This is referred to as full protection. Members who, at 01 April 2012, were between 10 years and 13 years 5 months away from their current NRA will have tapered protection; i.e. they will move to the new scheme at some point between 2015 and For example, if you are a member of the 1995 Section (without MHO and Special Class status) and are 49 at 01 April 2012 with a NPA of 60, you are 12 months in excess of 10 years away from your NPA and your tapered protection reduces by 24 months working back from 01 April 2022, meaning you would switch Schemes on 01 April The table below demonstrates this better: Years in excess of 10 years from current NRA at 01 April 2012 Date of switch to the new pension Scheme 01 April Over 3.5 years years years years years year months months Fully Protected MEMBER FUNDED EARLY RETIREMENT (2015 scheme) For members wishing to retire before their SPA there would be an opportunity to pay additional pension contributions to fund earlier retirement by up to 3 years without an actuarial reduction, subject to a minimum retirement age of 65. Any pension contributions would be expressed as a % increase in your contribution rate per year of earlier retirement. If you make earlier retirement contributions but subsequently choose to retire at a different date, benefits would be actuarially reduced or enhanced to take full account of the extra years of earlier retirement you have purchased. The additional costs would be in the region of 1.2% p.a. to 1.5% p.a. extra on top of your standard contribution for an actuarial reduction to not apply in respect of retiring ONE YEAR earlier than your new NRA, and could be as follows: Age at Commencement Additional Contribution % p.a. of salary of pensionable income (Source Unison What the proposed new NHSPS from 2015 could mean for you April 2012)

10 PART-TIME WORK If you work part-time during your career, and because your pension is a Career Average Re-valued Earnings scheme, your Average Re-valued Earnings will reduce and thus reduce the pension that you might have enjoyed had you worked full-time throughout your career. INFLATION AND PENSIONS IN RETIREMENT Previously, pension payments in retirement have increased in line with the Retail Prices Index (RPI). Now they will increase in line with the Consumer Prices Index (CPI). RPI includes the costs of housing (mortgage interest costs and council tax for example) while CPI does not. According to the Office of National Statistics, the average RPI figure over the two years to September 2012 was 4.42%, and for CPI, 3.73%. EXAMPLE If you were to retire now on a pension of, say, 40,000, and be in receipt of this pension for 25 years, with a 4.42% RPI uplift, this would have increased to over 112,000 over the 25 years. With a 3.73% average CPI uplift, it would have increased to around 96,000. CONTRIBUTION RATES Medical Money Management s view: The NHS Pension Scheme is certainly getting more expensive but our view is that it is still excellent value for money. Historical Rates Current Rates Proposed Rates Full-Time Pre 2008 April 2008 to April 2012 to From From Pay Range April 2012 April 2013 April 2013 April 2014 Up to 15, % 5.0% 5.0% 5.0% 5.0% 15,279-21, % 5.0% 5.0% 5.3% 6.5% 21,176-26, % 7.0% 6.5% 6.8% 8.0% 26,558-48, % 7.0% 8.0% 9.0% 9.2% 48,983-69, % 7.0% 8.9% 11.3% 11.0% 69, , % 8.0% 9.9% 12.3% 13.0% Over 110, % 9.0% 10.9% 13.3% 14.5% For an individual, these rates are not tiered. A scheme member earning, say, 75,000 will pay 12.3% of all pensionable earnings in the 2013/14 tax years, rather than a tiered rate up to 12.3%.

11 EXAMPLE In the 2012/13 tax year, Ian has pensionable profits and taxable income of 100,000, is therefore paying 9.9% of income into the pension scheme. Assuming Ian s income stays the same in 2013/14, Ian s pension payments will increase to 12%. Ian s tax calculations are as follows: 2012/ /14 100, Taxable Income 100,000 9, Pension Contribution 12, , Tax Free Allowance 9, , Taxable Income 78, , Income Tax at 20% 6, , Income Tax at 40% 18, , National Insurance 4, , Total Tax and NI 29, , Net Income 58, , Net Monthly Income 4, Ian s net income after all deductions would reduce by the equivalent of around 108 p.m. as a result of the increase in the pension payments. ADDITIONAL NHS PENSION Added Years (AY) are no longer available. They were replaced in 2008 with the Additional Pension (AP) Scheme, where one can purchase an additional pension to a fixed value of up to 5,000 p.a. at retirement. This can be funded by a one off lump sum or by spreading the cost over a maximum period of 20 years. If you are a member of the 1995 scheme and have entered into an AY contract, you will continue with your contract and the additional service will be credited to your pension at the NRA. Those who opted to switch into the 2008 scheme from the 1995 scheme would have suspended their AY contract, with additional service purchased to the date of transfer being transferred into the 2008 scheme. EXAMPLE Will is a member of the 1995 scheme and is on target to achieve 36 years of service to his NRA of 60. In 1996, at the age of 45, he decided to buy 4 AY to maximise his potential NHS Pension Scheme benefits. From his 46th birthday, he commenced payment of the Scheme, increasing his standard pension contribution (6% at the time, although now 12.3%). The cost of him purchasing these 4 AY was (4 x 1.58%) = 6.32% of income. The maximum AP, at his current age of 52, would cost 1,185 p.m., spread over the 7 remaining years to his NRA of 60, or alternatively, he can make a lump sum payment of 81,800. The younger you are, the lower the cost. Please note that it is now possible to apply to end an AY contact early, without the need to prove financial hardship. It seems likely that many individuals will stop AY contracts to avoid exceeding the annual or lifetime allowanced or both (see next section.)

12 PENSION LIMITS In April 2006 the Government introduced restrictions on how much an individual can pay into a pension contract and receive tax relief. This is known as the Annual Allowance (AA). At the same time it also introduced an overall limit to the amount of pension provision that an individual can accrue. This is known as the Lifetime Allowance (LTA). These allowances have subsequently been reduced on two separate occasions and now pose problems for many GPs. THE ANNUAL ALLOWANCE (AA) At the time the AA was introduced a member of the NHSPS could contribute, and receive tax relief upon, an amount equivalent to the lesser of, 100% of income or the prevailing AA. These limits were initially increased; however, they have subsequently reduced significantly as follows: Tax Year AA 2006/07 215, /08 225, /09 235, /10 245, /11 255, /12 and 2012/13 50,000 The AA will reduce to 40,000 from April If you are a member of a Money Purchase Scheme, such as a Personal Pension the AA is simply the amount contributed to the Scheme in any year which has to be considered. The NHSPS is, however, a Defined Benefit Scheme and therefore it is the increase in value of your benefits over the year which is tested against the AA. Those most at risk of exceeding the AA are likely to have over 25 years service, a high pensionble income or have recently received a significant increases in pensionable income. EXAMPLE The following AA calculations provide an estimate of how much of the AA that Tim, a 45 year old Dentist may have used in 2011/12 and takes into account the fact that he can carry forward any unused relief from the previous 3 tax years. This is particularly important if there is a significant increase in his income in any year which will disproportionately accelerate the accrual and could result in an unforeseen tax liability. Tim s historic income figures are: Pensionable Earnings Total Dynamised Earnings Pensionable Pay 2007/08 93,080 1,539,710 Pensionable Pay 2008/09 102,620 1,742,411 Pensionable Pay 2009/10 107,751 1,876,299 Pensionable Pay 2010/11 113,139 2,075,747 Pensionable Pay 2011/12 124,612 2,339,435 Current Pensionable Pay 119,982 2,545,976

13 An increase in NHS pension rights of only 2,631 p.a. (excluding any CPI adjustment) in a year will fully use up the AA for the current year, although the carry forward facility may be sufficient to allow Tim to avoid a tax charge. This endorses the importance of taking into account any private pension provision if applicable. Tax Year CPI Amount of AA Excess Above/Below AA Cumulative Unused AA 2012/ % 22, , , / % 53, , , / % 47, , , / % 11, , , From this, we see that in years where inflation is low, the chance of exceeding the AA is far higher, although if in the previous three years, where inflation may have been higher, there may be unused AA that can be carried forward. So, in 2011/12, Tim exceeded the AA of 50,000 by 5, Because inflation was high in 2009/10, Tim did not use any of the allowance and as such up to 50,000 could be carried forward from 2009/10 to 2011/12 to ensure that Tim stayed within the limits. In 2012/13, inflation increased to 5.2%, so it is very unlikely that Tim will exceed the allowance. For 2013/14, the inflation figure that will be used is 2.2% increasing the chance of Tim breaching the allowance. If he does exceed in 2013/14, he will potentially have unused allowance from 2012/13 that he can carry forward. THE LIFETIME ALLOWANCE (LTA) The LTA is the maximum amount of pension benefits that a member can accrue within qualifying pension schemes. An excess over the LTA, currently 1.5m, will be subject to a tax charge. This tax charge often referred to as the Recovery Charge or LTA Charge, can be applied in one of two ways: Lump Sum Tax Charge Income Tax Charge Funds over the LTA are subject to a 55% tax charge and the remaining fund is paid to the individual as a taxed lump sum; i.e. a 50,000 excess would be subject to a 27,500 charge with 22,500 being paid to the pension holder. The excess funds will be subject to a 25% tax charge and then the remaining funds used to provide a regular pension income, taxed at the highest marginal rate (usually 40%). The 25% tax charge is divided by 20 and deducted from the income payable from the scheme. For example, a 50,000 excess would be subject to a 12,500 charge, which would have the effect of reducing the pension income by 625 p.a. The LTA will reduce to 1.25m from 06 April 2014.

14 EXAMPLE Louise, qualified at the age of 24 and is retiring from her large NHS Practice at age 60. She has 36 years service, with total dynamised earnings of 4,918,286. Her NHS Pension benefits would be: Pension = 4,918,286 x 1.4% = 68,856 p.a. PCLS = 68,856 x 3 = 206,568. Louise has also made regular payments into a Personal Pension since she was 45. She paid 750 p.m., which increased by 5% every year. She has accrued a pension fund valued of around 222,000. To calculate the LTA value, the following formula is used: (Annual NHS Pension x 20) + PCLS + Personal Pension fund LTA value would be: ( 68,856 x 20) + 206, ,000 = 1,805,688. If Louise was retiring in the tax year she would have JUST breached the (then) 1.8m LTA. If Louise is retiring in the tax year, the LTA will have reduced to 1.5m and so she will have exceeded the LTA. Louise would see a Recovery Charge if the excess is refunded, thus: Lump sum charge: ( 1,805,668 1,500,000) x 55% = 168,117. If the Recovery Charge is to be deducted from pension income each year, the 25% charge on the excess fund is divided by 20, with the resultant figure being deducted from income for the remainder of Louise s life. The charge would be: Income charge: (( 1,805,668 1,500,000) x 25% / 20) = 3,821 p.a. If Louise is retiring after April 2014, the LTA will have reduced to 1.25m and so she will have exceeded the LTA by some margin. Louise would see a Recovery Charge if the excess is refunded, thus: Lump sum charge: ( 1,805,668 1,250,000) x 55% = 305,317. If the Recovery Charge is to be deducted from pension income each year the charge would be: Income charge: (( 1,805,668 1,250,000) x 25% / 20) = 6,946 p.a. Medical Money Management s view: Please take care if you are considering any form of additional pension contribution. Take great care and seek specialist independent financial advice if you are considering any additional pension payments in excess of your NHS pension. In the long run, these changes may force people to either leave the scheme, or retire early.

15 FIXED PROTECTION 2014 As already mentioned the LTA will reduce from 1.5m to 1.25m on 06 April As a consequence of this, a new transitional protection is being introduced Fixed Protection to help people who have pension rights that already exceed (or are likely to exceed) the reduced lifetime allowance. Those who register for this protection will have a personal LTA 1.5m (until such time, if ever, that the standard LTA increases above this), so it could offer valuable tax breaks. The trade-off is that they cannot remain an active member of a pension scheme after 05 April Another form of transitional protection, known as Individual Protection will also be available for people who, as at 05 April 2014, have pension rights worth more than 1.25m. This method is currently subject to consultation with full details expected by the end of Medical Money Management s view: We recommend a review of your current NHS Pension Scheme Benefits with a specialist Independent Financial Adviser in order to assess your personal LTA position. Please take great care if you are considering additional payments to any pension scheme. Disclaimer: The information contained within this NHS Pension Scheme Guide is for information purposes only, does not take into account your personal circumstances, and is not a substitute for obtaining professional financial advice. The information provided is based on our understanding of current law and taxation as at October HMRC policy, practice, and legislation may change in the future.