Avoid HMRC taxing your NHS Pension

A number of our dental clients have significant NHS pensions and as a result of legislation brought in over the last few years, HMRC wants take a slice of it. Ranjit Virk details what you need to do, to avoid tax rates of up to 70%. As a consequence of reducing the standard Lifetime Allowance (LTA) to £1 million from 6 April 2016, the Government’s solution is to offer new protections to members who could be impacted by the reduction (as they have done on previous occasions since the LTA was introduced on 6 April 2006). From 6 April 2016, there are now two more HMRC LTA protections available:
  1. Fixed Protection 2016
  2. Individual Protection 2016
If your benefits exceed the Lifetime Allowance, any tax free lump sum at retirement will be taxed at 55% and any income is taxed by a further 25% (this would be in addition to your marginal rate of income tax). It’s therefore absolutely crucial that NHSPS members are aware of the options available to avoid this penal rate of tax.

Fixed Protection 2016

You can apply for Fixed Protection 2016, whether your benefits exceed £1 million or not, as long as you do not already have one of the following protections:
  • Enhanced Protection
  • Primary Protection
  • Fixed Protection 2012
  • Fixed Protection 2014
For Fixed Protection 2016 to remain valid there can be no benefit accrual after 5 April 2016. Fixed Protection 2016 is lost on the day benefit accrual occurs. Benefit accrual includes:
  • any pension contributions paid to a defined contribution scheme, this includes the NHS Money Purchase AVC Scheme; or pension growth in NHS pension benefits that exceed a relevant percentage.
  • To avoid the risk of losing Fixed Protection 2016 certain members may wish to opt out of the NHS pension scheme. We would advise you do not this without prior consultation with either a Essential Money adviser or equally qualified Independent Financial Adviser.
Once you have Fixed Protection 2016 (and it remains valid) your LTA is fixed at £1.25 million. Importantly, if you are a 1995/2008 Scheme member with Tapered Protection, Fixed Protection will be lost when you move and contribute to the 2015 Scheme.

Individual Protection 2016

You can apply to HMRC for Individual Protection 2016 as long as you do not have Primary Protection (active or dormant) and the capital value of your pension benefits, from all your registered pensions schemes including your NHS pension benefits, is equal to or over £1 million as at 5 April 2016. Individual Protection 2016 allows you to build up further benefits in the NHS Pension Scheme without the risk of losing this protection. You will have an individual LTA equal to the capital value of your benefits at 5 April 2016 but subject to a maximum cap of £1.25 million. Pension benefits will be protected up to this amount and as a result you may be able to take a tax free lump sum of up to 25% of your individual LTA. This will be lower if you already have pension benefits in payment. An LTA charge would be due on benefits in excess of your individual LTA amount. Individual Protection will remain dormant if you have Enhanced Protection or Fixed Protection 2012, 2014 or 2016.

Individual Protection 2014

The deadline for Individual Protection 2014 was on 5 April 2017. If you had a pension value of more than £1.25 million as at 5 April 2014 and were able to register for Individual Protection 2014 you will have a personalised Lifetime Allowance higher than £1.25 and less than £1.5m.

Individual Protection 2016 Valuations
If you are applying for Individual Protection 2016 you will need to know the value of your NHS pension benefits as at 5 April 2016 and will therefore need to apply to NHS Pensions for an ‘Individual Protection 2016 Valuation’ (IP2016 Valuation). You will also need to know the value of any other pension arrangements.

Dental Practitioner members

NHS Pensions will routinely only provide IP2016 Valuations when dental pensionable earnings and revaluation information up to 5 April 2016 have been confirmed. You can request a IP2016 Valuation using form AW295 (GP-IP2016). The main advantage of Individual Protection is you can still accrue pension benefits and unlike Fixed Protection the protection will not cease. The current value of your pension will be your ‘individual’ allowance and any pension benefits accrued above that will be liable to the tax charges relevant at the time of taking your benefits.