By David Lamb CFP™ MCSI
Well, I didn’t see that coming!
Chancellor Jeremy Hunt has abolished the pensions lifetime allowance and increased the annual allowance by 50% to £60,000.
The lifetime allowance (LTA) is the maximum amount you can have in pension funds before paying tax. The current limit is £1,073,100. If this is exceeded, tax of 55% is paid on a lump sum and 25% on income (from the pension).
The annual allowance (AA) is the limit that can be paid into a pension in any one tax year – currently £40,000 – whilst still qualifying for tax relief. Any payments above this will be added to your income and you will be subject to tax at your marginal rate.
If your income exceeds £200,000 your AA will gradually taper to as low as £4,000, meaning any contribution above this will be taxable.
Many people may think these are large amounts of money, a nice problem to have and it doesn’t affect me, but indirectly it may.
Having a few clients who are employed by the NHS, I see how they are penalised for working so hard.
The NHS pension is a defined benefit scheme, which means that the benefits are calculated as a proportion of salary. To provide this guaranteed pension costs a lot of money, often in excess of the current £1,073,000 LTA.
This means that the longer an NHS employee works, the more tax they will pay in retirement on top of normal income tax. This acts as a bit of a disincentive to work to normal retirement age, which is why a survey by the British Medical Association found that almost half of all consultants were planning to leave, or take a break, over the next 12 months.
But it gets worse when the AA is also considered.
These are expensive to fund and, as so many senior medics are well paid, they exceed their AA and are taxed immediately on this benefit, resulting in a double disincentive.
More and more NHS workers, already feeling stressed, are retiring early or working part-time and this is where everyone is affected; longer NHS waiting lists and making it extremely difficult to see your GP.
Hopefully these changes will encourage doctors to take on extra work to reduce waiting lists without being heavily penalised.
Expert predictions suggested that the LTA was going to rise to £1.8m which, according to leading wealth management provider Quilter, could result in a benefit to a pension scheme holder who has a fund of £1.8m of around £181,725 due to saved tax.
Mr Hunt has gone way beyond this.
So, that’s some good news. Tomorrow, I suspect, will be when we start to learn how today’s budget will hurt us….
