Retirement planning for medical professionals

The 2023 Spring Budget surprised almost everyone with the abolition from April 2023 of the Lifetime Allowance pension tax charge.

For clinicians in the NHS, this has got to be welcome news, although those who have retired in the last twelve months may be grinding their teeth a bit!

Now might be an opportune time to point out a few more reasons to be a little more positive about the pensions outlook.

Lifetime Allowance

Yes, it has gone. And that removes a stroke a big problem for Consultants and GPs. A 60-year-old clinician with a 1995 pension of £60,000 subject to the lifetime charge, and with no other protection in place, would previously have seen a reduction to that pension of £3,500 per annum.

Now they won’t. Quite whether that encourages you to stay in the NHS, as intended, or leave and take your higher benefit now remains to be seen.

Be careful about making snap decisions to jump straight back into the scheme if you have previously opted out. The Labour Party have pledged to reintroduce the charge.

You may have previous forms of Lifetime Allowance protection in place that may be jeopardised by opting back in. With no charge at present, that would not be an issue. If one is brought back in, and that protection has been lost, you may be in trouble. Seek advice from a specialist independent financial adviser before deciding.

Annual Allowance (AA)

There are influencing factors from several different directions here.

Consultant Clinical Excellence Awards

Since 2018 any new local awards have not been pensionable, which has a significant mitigating effect on AA exposure. Recently we reviewed a new client’s AA position for earlier years.

For some years she had held a CEA 4, but then in one go, prior to 2018, was awarded 5, 6, 7 and 8, all pensionable. The AA exposure was eye-watering - that would not happen now.

Standard Allowance

For nine years the standard allowance stood at £40,000, with no index-linked increases. We all know the effect of this with tax bands and allowances. Many would call this a stealth tax.

From April 2023, however, the standard AA has increased to £60,000, providing more welcome relief.

Tapered Annual Allowance (TAA)

The TAA affects higher earners and means that the standard AA above can be reduced. In 2020/21, though, the income limits at which this kicked in were increased significantly, with a further increase resulting from the standard allowance change in 2023/24 as above. Also, the minimum allowance has been increased from £4,000 to £10,000. 

Benefit revaluation

Changes are due within the Pension Regulations for the scheme benefits themselves. There has previously been a mismatch between the percentage by which scheme benefits are uplifted each year and the allowance by which benefits may grow for AA purposes.

The respective percentages were based on inflation but taken from different years. Those years are being brought into line, so high inflation for revaluing benefits also provides you with a more generous allowance for AA purposes.

McCloud

The remedy for the discrimination identified by the above case is due to start being implemented later in 2023.

For many members, the movement of the accrual of benefits up to 2022, currently in the 2015 scheme, back to the member’s original scheme will reduce the overall AA exposure.

Contributions

From October 2022, the cost of being in the scheme for higher, middle and top earners has reduced.  The top rate of employee contribution has fallen from 14.5% to 13.5% of pensionable pay. It doesn’t sound much, but 1% of £100,000 is still quite a bit of money.

Pension flexibility

One of the issues with the 1995 pension scheme is the ‘all or nothing’ nature. You are either in or out, taking your benefits or not, all of that is changing from April 2023. Partial retirement and continued membership for ongoing work are examples of what will now be available. With greater flexibility comes more complexity, of course, but at least you will have options, and that can only be positive.

Again, it is essential to take the right advice to assist with decision-making.

Summary

The treasury, DHSC and other government departments have finally aligned, making prudent changes to the UK pension tax and enhancing the NHS pensions scheme retirement flexibilities. While these changes are positive, there is now an array of retirement choices available to members of the pension scheme; and as with most scenarios, choice bring about additional complexity. Undoubtedly, many will seek to achieve a fair balance between the flexibility of retirement & the optimal level of benefits.

We would encourage you to seek the advice of specialist advisers in this instance, to ensure you successfully reach this point.

This article should not be construed as a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances. No action should be taken without seeking further formal advice.

MHA Moore and Smalley is the trading name of Moore and Smalley LLP. Moore and Smalley LLP is regulated by the Financial Conduct Authority, FCA registration number 448716.