With the Lifetime Allowance frozen at £1,073,100 until 2026, even more medical professionals now face the possibility of exceeding their LTA before they reach their retirement age. Many doctors in their late 40s and early 50s will find the value of their pension close to or even in excess of the LTA already, and with annual growth for LTA purposes for many exceeding £50,000, the LTA tax charge at retirement has the potential to be the largest tax charge that many people will ever face.
However, it is not all bad news. The recent resolution announced following the McCloud discrimination ruling will actually reduce many individuals’ LTA positions and the rate of future LTA growth, whilst also leaving many better off in retirement (due to the lower retirement ages of the legacy schemes and the automatic lump sum attached to the 1995 Scheme). As such, some individuals may find that their LTA problems are a little further away, or perhaps a bit smaller, as a result of these changes.
Furthermore, it is also fair to say that one form of LTA planning is to take your pension earlier. Therefore, this freezing of the Lifetime Allowance could be yet another example of pension legislation that inadvertently drives a number of doctors to consider retirement, or at least change their working patterns, earlier than they otherwise might have.
Ultimately, for those still celebrating the end of the tapered Annual Allowance calculations (following the increased thresholds introduced from 6th April 2020), this recent change to the LTA means that many will have to dust-off their NHS pension files and reconsider their pension position and retirement plans.
So what you need to do now?
- The first step is to get clarity on your current pension position. For many that will be as simple as downloading a Total Reward Statement. For others it may involve some additional work to bring your pension record up to date.
- Then you need to understand what the recent McCloud ruling may mean for your current and future pension position.
- You then need to project your pension benefits forward to your expected retirement age to see if, and by how much, you may exceed the LTA.
- You can then start to consider the options available to you to minimise your tax charges and/or maximise your position in retirement.
- One element of planning that we expect to become more prominent again is the potential to apply for HMRC protection to preserve a higher LTA than the £1,073,100 amount mentioned above. This won’t be available to everyone but if you have been out of the scheme for a number of years already, or if your pension benefits are already in excess of the LTA, it is something worth considering.
A word of caution
It should be noted that proximity to the LTA does not automatically mean that it is sensible to opt-out of the scheme, and for many that will not be the right course of action. However, if you are accruing pension benefits that may ultimately suffer two or three layers of taxation – Annual Allowance, Lifetime Allowance and Income Tax – you should take time to develop an appropriate strategy to ensure you are getting value for the pension contributions you pay.
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