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1) A dental practitioner aged 60 draws their NHS pension of £40K pa in May 2016. |
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Lifetime allowance : £1m |
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NHS pension 'value': £920,000 |
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Excess: £0 |
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LTA HMRC charge: £0 |
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2) A dental practitioner aged 60 draws their NHS pension of £50k pa in May 2016 and takes 25 per cent tax-free cash from their personal pension. |
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Lifetime allowance: £1m |
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NHS pension 'value': £1.15m |
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Excess: £150,000 |
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LTA HMRC charge: £1,875pa (from gross NHS Pension Scheme income for life) |
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3) A dental practioner aged 60 draws their NHS pension of £40k pa in May 2016 and takes 25 per cent tax-free cash from their personal pension. |
|
Lifetime allowance: £1m |
|
NHS pension 'value' £920,000 |
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Personal pension: £250,000 |
|
Excess: £170,000 |
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LTA HMRC charge: £2.125pa |
Freedom or jeopardy?
Volume 31 · Issue 5
Jon Drysdale warns of the risks involved with taking money from your pension.
Rules restricting withdrawals from pension funds were lifted from April 6, with widespread concern that those over 55 would plunder their pension pots. However, it is more of a concern that dentists withdrawing cash from their pensions could create a significant income tax liability. For example, a dentist in receipt of £42,385pa of NHS pension (or other) income could immediately be liable for higher rate tax on pension withdrawals.
One key advantage of pension savings is that 25 per cent of your fund can be withdrawn tax-free. It remains to be seen if a change of government would impose new rules restricting this. Once the 25 per cent tax-free cash has been exhausted, withdrawals from your fund are liable for income tax at your highest rate. As such, careful planning will be required to manage income tax liabilities.
Beware unintended consequences
Another less well known consequence of drawing income or tax-free cash from your pension is the test against the
Lifetime Allowance (LTA).
The LTA is a limit on pension fund values, which is set to reduce from £1.25m to £1m in April 2016. While most dentists won’t have personal pensions valued in excess of £1m, it is important to consider how the NHS pension is valued in respect of this limit. Some examples are shown in box 1.
BOX 1
It is possible to protect against the reduction to the LTA, although this usually means that active pension contributions to NHS or personal pensions will need to stop. Dentists therefore need to weigh up the benefits of applying for this protection against stopping further pension accrual. Specialist advice will be required here as the accrual rules for the practitioners’ NHS Pension Scheme are vastly different to the general NHS Pension Scheme.
Reasons not to take part in ‘pension freedom’
There is very little reason for dentists who are over the age of 55 and continuing to work to take cash or income from their pensions. The NHS Pension Scheme imposes heavy penalties on ‘early retirement’ so it is rarely a good idea to draw scheme benefits early.
There are also compelling reasons to leave your personal pensions intact, not least that investors have enjoyed strong investment growth in recent times, with the FTSE 100 and other global stock markets reaching record highs in early 2015. Pensions benefit from (largely) tax-free growth and, in most cases, remain exempt from inheritance tax. One positive aspect of recent legislation allows personal pensions to be cascaded down the generations, without the need for a compulsory annuity purchase and without an automatic tax charge on death.
There is no ‘one touch’ simple solution to drawing pension benefits and planning tax efficient retirement income requires careful analysis. The government’s ‘guidance guarantee’ is not likely to meet the more complex needs of dentists, especially where LTA issues are concerned and definitely not in relation to the NHS Pension Scheme.
While ‘pension freedom’ is a welcome relief for many, it may open up financial risks for dentists. As always, guidance should be sought through a suitably qualified and independent adviser who has experience within the dental field.