Why Pensions Simplification Will Be Far From Simple For Doctors

David Trenner

 For doctors, pensions simplification, when it arrives, is unlikely to be very simple. And the forthcoming changes to the NHS Pension Scheme look set to complicate matters further still. The following case of John and Sheila Feelgood shows just how complicated simplification could well be.

John Feelgood is a doctor in an NHS practice and also does private work. He was 51 last October, and is married to Sheila. Sheila, who will be 46 in June, works as a part time receptionist in the practice.

They are both keen to maximise their pension contributions as they hope to retire in the next few years. John currently pays £3,000 p.a. to the NHS Pension Scheme and also has a personal pension in respect of his private earnings of £60,000 p.a. into which he pays £500 per month. Sheila has worked for John for nearly seven years and currently earns £8,000 p.a. Some years ago she started a retirement annuity into which she pays £20 per month.

How might John and Sheila maximise their pension contributions under the current rules?

Based on his NHS contributions of £3,000 p.a., John’s NHS earnings are £50,000 p.a. (this is calculated by multiplying the contributions by 16.66.) His first option is to pay AVC’s or FSAVC’s on this £50,000 amounting to 9%, giving a gross payment of £4,500 which could be paid as a single premium. In addition, he could increase his personal pension contributions to 25% of £60,000 i.e. £15,000 p.a., paying a single premium of £9,000.

Alternatively, he could take advantage of the A9 concession and forgo tax relief on the NHS contributions and then treat his full earnings as non-pensionable. He would be restricted by the earnings cap of £102,000, and could pay 25% of this, i.e. £25,500, giving a further single contribution of £19,500. He would still receive tax relief on this contribution.

Sheila has a retirement annuity, which means that she can carry forward unused relief from up to six years ago. As she was 44 on 6 April 2004 , she can pay 17.5% of earnings in the current tax year, which is £1,400, but she could have paid 17.5% of earnings in each of the six previous years. As she has only been paying £240 p.a., she will have unused relief of something approaching £7,000, although as the maximum contribution including carry forward is 100% of earnings she cannot pay more than £8,000.

The maximum personal pension contribution is 20% of earnings, but any payment to a personal pension in the current tax year will prevent Sheila from using carry forward under her retirement annuity. She could, however, use up her relief in the current tax year and then pay 20% into a personal pension in the 2005/06 tax year.

Alternatively, John could set up an occupational pension for Sheila, as she will be in receipt of Schedule E earnings. John does not need to be a limited company to set up an executive pension for an employee, and he could fund for a pension of two thirds of salary at age 60, as Sheila will have completed 20 years service by then.

As can be seen, the options open to John and Sheila are already complex, but how is simplification likely to affect them? Unfortunately, ‘simplification’ is a complete misnomer in that it will only serve to further complicate matters.

Simplification will come into effect on 6 April 2006 , whilst changes to the NHS pension scheme will start to apply from 1 April 2006 . Simplification will permit significantly higher contributions to be made by both John and Sheila, although it appears that the A9 concession will disappear.

Confusingly, however, there will be no maximum contribution, just a maximum with tax advantages. If John wants the maximum with tax advantages, he will be able to pay an amount equal to his total earnings into his pension arrangements. All he has to do is calculate the NHS Scheme contributions so that he can deduct these from his earnings and pay the difference into a personal pension.

Sheila will be able to pay up to £8,000 into a personal pension. Alternatively, John, as her employer, could pay up to £215,000 into a scheme for her, subject to his tax inspector agreeing that this is ‘reasonable’.

Sheila could however be caught by the change in the earliest retirement age permitted. She will be 50 in June 2009, and could retire then under present rules. However, if she does not retire before 6 April 2010 , she will not be able to retire until June 2014, when she is 55. This could disrupt their plans to retire in ‘the next few years’.

John will be caught out by the proposed changes in the NHS scheme. The cut off date to reach age 60 and retire on unreduced benefits is 1 April 2013 . Even though John wants to retire before this, the reduced pension paid at, say, age 57 will reflect the effect of the new calculation of the benefit he would have earned at October 2013.

Consequently, for John and Sheila, simplification will be far from simple. Indeed, for John and thousands of others, changes in public sector pensions will simply add to the complexity.

David Trenner is Technical Manager at Intelligent Pensions     Tel:  0141 332 0320
www.intelligentpensions.com

 (18/2/05)