This document provides guidance for doctors on recent changes affecting the NHS pension scheme. Key points include: - The 1995 and 2008 pension sections were impacted by annual and lifetime allowance restrictions on tax relief. - Contribution rates for members have been increasing and will continue to rise. - The Hutton report recommended linking the normal pension age to the state pension age and replacing final salary schemes with career average schemes. - A new NHS pension scheme is planned for 2015 with accrual based on 1/54th of career earnings and a normal pension age linked to the state pension.

1. Exeter 7 March 2013
Torquay 12 March 2013
Plymouth 13 March 2013
Truro 9 April 2013
Luke Bennett
Reduced Pension
Allowances –
Guide for Doctors

2. Introduction
Luke Bennett – Truro office
luke.bennett@francisclark.co.uk
Stuart Cowen – Plymouth office
stuart.cowen@francisclark.co.uk
Sharon Austen – Exeter office
sharon.austen@francisclark.co.uk
www.francisclark.co.uk

3. NHS Pension Scheme –
Impact of Changes
• 1995 v 2008 sections
• Annual allowance
• Lifetime allowance
• Increasing contribution rates
• Hutton report
• National Employment Savings Trust
www.francisclark.co.uk

4. www.francisclark.co.uk

5. NHS Pension Choice
1995 Section 2008 Section
Normal retirement age 60 65
Benefits 1.4% earnings plus 1.87% earnings
lump sum minus lump sum
Survivor pension 50% 37.5%
www.francisclark.co.uk

6. NHS Pension Choice
1995 Section 2008 Section
Lump sum Normally 3 x Minimum 4.2% of
pension earnings up to
31/03/2008
Maximum 5.36 x Maximum 4.28 x
pension pension
Added years Continue Cease but benefit to
contributions date transferred
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7. Restriction of Tax Relief –
Annual Allowance
• £50,000 maximum
• Reducing to £40,000 from 2014/15
• Special rules for defined benefit schemes
• Measured against growth in benefits
• 16 x growth in pension + growth in lump sum
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8. Restriction of Tax Relief –
Annual Allowance
Annual pension input (growth in benefits)
Example for consultants (member of 1995 Section)
Salary at 31 March 2011 £110,000
Years of service 34
Pension rights at 31 March 2011
£110,000 x 34 / 80 £46,750
Increase by CPI (September 2010) 3.1% £48,200
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9. Restriction of Tax Relief –
Annual Allowance
Annual pension input (growth in benefits)
Example for consultants (member of 1995 Section)
Salary at 31 March 2012 £118,000
Years of service 35
Pension rights at 31 March 2012 £51,625
£118,000 x 35 / 80
Pension rights at 31 March 2011 £48,200
Growth in pension in year £3,425
Growth in lump sum in year (3 x pension) £10,275
Annual pension input = 16 x pension growth + lump sum growth
16 x £3,425 + £10,275 £65,075
Excess over annual allowance taxed at marginal rate
£15,075 x 40%? £6,030
www.francisclark.co.uk

10. Restriction of Tax Relief –
Annual Allowance
Likelihood of being affected when annual allowance £50,000
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11. Restriction of Tax Relief –
Annual Allowance
Establish position at 31 March 2011
Simplified example for GP (member of 1995 Section)
Career earnings at 31 March 2011 £2,000,000
“Regulation 72 fraction”
Years in NHS pension scheme 20 1.250
Years as a GP 16
Pension = 1.4% of career earnings x Reg 72 fraction
1.4% x £2,000,000 x 1.250 £35,000
Increase by CPI (September 2010) 3.1% £36,085
www.francisclark.co.uk

12. Restriction of Tax Relief –
Annual Allowance
Establish position at 31 March 2012
Simplified example for GP (member of 1995 Section)
Career earnings at 31 March 2011 £2,000,000
Dynamisation factor for 2012 (CPI to Sep 11: 6.7% £134,000
5.2% + 1.5%)
Pensionable earnings in 2011/12 £110,000
Career earnings at 31 March 2012 £2,244,000
“Regulation 72 fraction”
Years in NHS pension scheme 21 1.235
Years as a GP 17
Pension = 1.4% of career earnings x Reg 72 fraction
1.4% x £2,244,000 x 1.235 £38,808
www.francisclark.co.uk

13. Restriction of Tax Relief –
Annual Allowance
Annual pension input (growth in benefits)
Simplified example for GP (member of 1995 Section)
Value of pension at 31 March 2012 £38,808
Value of pension at 31 March 2011 (after £36,085
allowance for inflation)
Growth in pension in year £2,723
Growth in lump sum in year (3 x pension) £8,169
Annual pension input = 16 x pension growth + lump sum growth
16 x £2,723 + £8,169 £51,737
Excess over annual allowance taxed at marginal rate
£1,737 x 40%? £695
www.francisclark.co.uk

14. Restriction of Tax Relief –
Annual Allowance
• Unused relief from previous three years can be carried forward
• Added years contracts complicate calculations and increase
pension growth
• Private pension contributions to be factored in
• NHS Pensions required to calculate figures for 2011/12 and
2012/13 by October 2013
• Self assessment tax return for 2011/12 was due January 2013!
www.francisclark.co.uk

15. Restriction of tax relief –
Lifetime allowance
• Lifetime pension savings limit reduced from £1.8 million to £1.5
million on 6 April 2012
• Further reduction to £1.25 million planned for 6 April 2014
• Calculation based on 20 x pension + lump sum (+ value of any
private pension funds)
www.francisclark.co.uk

16. Restriction of tax relief –
Lifetime allowance
Example for member of 1995 Section £
Career earnings at £4.7 million
retirement
Pension: 1.4% of £65,800
career earnings
Multiply by factor of 20 1,316,000
Lump sum (3 x 197,400
pension)
Value of pension 1,513,400
For retirement between 6 April 2012 and 5 April 2014 charge on
excess over £1.5 million
£13,400 x 25% £3,350
Pension reduced by 1/20th of lifetime allowance charge
Pension therefore reduced from £65,800 to £65,632
www.francisclark.co.uk

17. Restriction of tax relief
Benefit of extra year’s membership If neither
allowance
exceeded
£
Pensionable pay 100,000
Employer’s and employee’s contributions 27,500
Tax relief (40%) (11,000)
Increased lump sum (4,200)
Net cost 12,300
Annual pension 1,400
Lifetime allowance charge -
Tax (40%) (560)
Net benefit 840
Effective annuity rate 6.83%
www.francisclark.co.uk

18. Restriction of tax relief –
Lifetime allowance
Benefit of extra year’s membership If neither If lifetime
allowance allowance
exceeded exceeded
£ £
Pensionable pay 100,000 100,000
Employer’s and employee’s contributions 27,500 27,500
Tax relief (40%) (11,000) (11,000)
Increased lump sum (4,200) (4,200)
Net cost 12,300 12,300
Annual pension 1,400 1,400
Lifetime allowance charge - (403)
Tax (40%) (560) (399)
Net benefit 840 598
Effective annuity rate 6.83% 4.86%
www.francisclark.co.uk

19. Restriction of tax relief –
Lifetime allowance
Benefit of extra year’s membership If lifetime If lifetime If lifetime
allowance allowance and annual
not exceeded allowance
exceeded exceeded
£ £ £
Pensionable pay 100,000 100,000 100,000
Employer’s and employee’s contributions 27,500 27,500 27,500
Tax relief (40%) (11,000) (11,000) (11,000)
Annual allowance charge - say 5,000
Increased lump sum (4,200) (4,200) (4,200)
Net cost 12,300 12,300 17,300
Annual pension 1,400 1,400 1,400
Lifetime allowance charge - (403) (403)
Tax (40%) (560) (399) (399)
Net benefit 840 598 598
Effective annuity rate 6.83% 4.86% 3.46%
www.francisclark.co.uk

20. Restriction of tax relief –
Lifetime allowance Transitional Protection
• Option to elect for fixed protection
 Maintains lifetime allowance at £1.5 million
 No contributions after 5 April 2014
 Election must be made by 5 April 2014
• Option to elect for personalised protection
 Available if pension rights exceed £1.25 million at 5 April 2014
 Maintains lifetime allowance at 5 April 2014 value (max. £1.5 million)
 Can continue making contributions
www.francisclark.co.uk

21. Increasing employee contribution rates
2011/12 2012/13 2013/14 2014/15
(possible)
Up to £15k 5.0% 5.0% 5.0% 5.0%
£15k to £21k 6.5% 5.0% 5.3% 5.3%
£21k to £27k 6.5% 6.5% 6.8% 6.8%
£27k to £49k 6.5% 8.0% 9.0% 9.75%
£49k to £70k 6.5% 8.9% 11.3% 12.5%
£70k to £110k 7.5% 9.9% 12.3% 13.5%
£110k and over 8.5% 10.9% 13.3% 14.5%
www.francisclark.co.uk

22. Reduced monthly drawings from
April 2013?
Pensionable profit Before tax After tax
£60,000 £120 £72
£80,000 £160 £96
£100,000 £200 £120
£120,000 £240 £144
£140,000 £280 £168
www.francisclark.co.uk

23. Hutton Report
• Link normal pension age to state pension age
• Final salary schemes replaced by career average earnings
schemes
• Implement changes by 2015
www.francisclark.co.uk

24. Government offer
• New scheme from 1 April 2015
• Those within 10 years of retirement at 1 April 2012 stay in existing
scheme
• Date of joining new scheme delayed for those between 10 and 13.5
years of retirement at 1 April 2012
www.francisclark.co.uk

25. Protection
Age at 1 April 2012 Switch to new
(if member of 1995 scheme
scheme)
<46.5 1 April 2015
47 1 April 2016
47.5 1 April 2017
48 1 April 2018
48.5 1 April 2019
49 1 April 2020
49.5 1 April 2021
50 N/A
www.francisclark.co.uk

26. New NHS Pension Scheme
• Career earnings for all members (GPs already on career earnings)
• Dynamisation continues at inflation + 1.5%
• Accrual rate 1/54th = 1.85185%
• Normal pension age linked to state pension age
• State pension age = 67 or 68?
www.francisclark.co.uk

27. Protection for accrued benefits
Value of new scheme compared with 1995 Section
100%
98%
96%
94%
92%
90%
88%
86%
84%
82%
45 46 47 48 49 50
Age at 1 April 2012
Assumes member joined scheme at 25 and retires at 60
www.francisclark.co.uk

28. Accountancy/Tax advice IFA advice
Annual allowance calculation Stop paying into NHS Scheme?
Lifetime allowance calculation Take early retirement?
Prediction of NHS pension Elect for fixed protection?
www.francisclark.co.uk

29. National Employment Savings Trust
• All employers compelled to offer either a Qualifying Workplace
Pension Scheme (e.g. NHS) or NEST
• Will affect non-NHS employing bodies
• Employer contribution 3% to 4%
• Employee contribution 3% to 4%
• Opt-out option for employee
• Phased introduction up to 2017
www.francisclark.co.uk

30. NHS Pension
(average earnings £100,000 per annum)
Lifetime Retirement Pension Lump sum
contributions age
£ £ £
1995 Section 752,500 60 45,573 188,125
2008 Section 860,000 65 56,883 215,000
New scheme? 1,182,500 68 54,995 295,625
www.francisclark.co.uk

31. NHS Pension Personal Pension
(average earnings £100,000 per annum)
Lifetime Retirement Pension Lump sum
contributions age
£ £ £
1995 Section 752,500 60 45,573 188,125
14,742
2008 Section 860,000 65 56,883 215,000
20,711
New scheme? 1,182,500 68 54,995 295,625
32,086
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33. Luke Bennett - Truro
luke.bennett@francisclark.co.uk
01872 276477
Stuart Cowen - Plymouth
stuart.cowen@francisclark.co.uk
01752 301010
Sharon Austen - Exeter
sharon.austen@francisclark.co.uk
01392 667000