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Main Points
1. From 6 April 2011, you will have an annual pension contribution allowance of £50,000 this includes employer funding.
For the purposes of calculating the value of your NHS Pension contributions the following calculation must be applied as opposed to using the percentage amount you contribute.
1995 Scheme
Salary x 1/80th x 16 plus tax free cash |
= |
contribution value |
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Example:
£40,000 x 0.0125 x 16 plus tax free cash |
= |
£8,500 |
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2008 Scheme
Salary x 1/60th x 16 |
= |
contribution value |
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Example:
£40,000 x 0.0166 x 16 |
= |
£10,264 |
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2. Although Individuals are now restricted to an annual pension contribution of £50,000, they can "carry forward" three previous tax years.
New Pension legislation introduced by the Government has re introduced the concept of "Carry Forward", whereby and individual can roll up unused pension contribution allowances from earlier tax years.
Whilst the measure has been introduced to help members of defined benefit schemes to avoid unnecessary taxation if they were to receive a significant rise in their income, there are no restrictions in the draft legislation to prevent high earners taking advantage of this facility.
However there is one qualifying factor in the rules and that is, the individual must have been a member of a registered pension scheme in the tax year(s) that they wish to use carry forward from.
The following illustrates the rules in action and is based upon the new maximum pension contribution allowance of £50,000 which is back dated to the 2008/2009 tax year
Tax Year |
Pension input / contribution amount |
Unused Allowance |
|---|---|---|
2008/2009 |
£30,000 |
£20,000 |
2009/2010 |
£30,000 |
£20,000 |
2010/2011 |
£10,000 |
£40,000 |
Therefore in tax year the tax year 2012 an individual could contribute a total amount of £130,000 of which £80,000 is their carry forward amount and £50,000 is their annual contribution allowance.
This new facility is particularly useful to individuals who wish to make single premium contributions but were restricted by the previous £20,000/£30,000 contribution limit.
It can also help individuals who may exceed the £50,000 per annum contribution limit.
Tax relief up to the individual's highest marginal rate will be allowed on pension contributions.
3. & 4. Individuals who under the previous tax regime made pension contributions in excess of the £20,000/£30,000 limit were given "Protected Input" status in respect of those contributions.
This protection will cease with effect from 6 April 2011.
The threshold for NHS incomes whereby they would be in danger of exceeding the £50,000 contribution allowance are as follows:
1995 Scheme |
£185,000 |
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|---|---|---|
2008 Scheme |
£167,000 |
Contributions made in excess of the annual contribution allowance where carry forward cannot be used will attract a tax charge at the individual's highest marginal rate, effectively meaning that no tax relief on pension contributions is given where individuals exceed their annual allowance.
5. If you have private pension arrangements, you are no longer compelled to purchase an annuity at age 75.
There is no longer any compulsion to purchase an Annuity at age 75.
6. For those individuals who accept the investment risks involved an Income Drawdown plan can be a suitable income generating retirement vehicle offering a high level of flexibility.
However, the maximum income level that will be available on "Capped" Income Drawdown will be 100% as opposed to currently 120% of the Government Actuaries Department (GAD) rates.
7. For those individuals who would like a far higher degree of control of their plan income levels and who have a minimum guaranteed income level of £20,000 per annum in payment. This can include State Pension provision. A Flexible Income Drawdown plan would be attractive.
Under these arrangements the entire value of the plan can be withdrawn from day one, 25% of which will be tax free with the balance added to the individual's income and taxed at the highest marginal rate.
This plan will be of special interest to members of the NHS Pension Scheme who have a healthy retirement income and who have used private pension arrangements as a tax planning facility.
8. With regards to benefits taken under Income Drawdown plans, the plan values will now attract a charge upon death of 55% when:
If you would like clarification on any aspect of this new legislation, please contact us for assistance.
9. Lifetime Pension Fund Limited reduced to £1.5 million from £1.8 million.
The value of your NHS Pension for purposes of calculating your lifetime fund limit can be obtained from The NHS Pension Agency at Fleetwood.
Alternatively, if you know what your NHS Pension figure is, multiply it by 20 and add on the tax free cash.
Example:
NHS Pension £40,000 x 20 plus tax free cash of £120,000 = £920,000
Assuming the individual does not have any other pension arrangements they will not suffer any tax charge under the LPL.
If you feel that the value of your retirement funds will exceed the LPL please contact us for advice as there are a number of solutions to the problem.
Please note:
The details given are provided only to cover the main points of the new and proposed legislation, as with all these matters, the devil is in the detail. Therefore please seek specialist advice with regards to your own circumstances.