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# Restricting pensions tax relief 2014-2015

### Summary

On 5 December 2012, the Government announced its proposed changes to the taxation of pension savings due to be introduced from April 2014.

The changes are:

- Annual Allowance ("AA") will reduce from £50,000 to £40,000 from April 2014
- The single valuation factor will remain at 16
- Indexation of accrued benefits is in line with the Consumer Prices Index (CPI) ("inflation proofing")
- Unused AA from up to three previous years can be "carried forward" and offset against excess pension savings made in a particular year. For this purpose, the AA in the years prior to 2014 is assumed to be £50,000.

In addition, the Lifetime Allowance (LTA) will be reduced from £1.5m to £1.25m with effect from April 2014. Fixed protection will be available from summer 2013 until the deadline for application, of 5 April 2014, which will enable benefits up to £1.5m to be taken without any additional tax charge.

Whilst Fixed protection will allow you to take benefits worth up to £1.5 million without paying the lifetime allowance charge, your ability to accrue benefits in the future is limited. HM Revenue & Customs (HMRC) must have received your application before 5 April 2014.

Those who were previously protected by either Primary, Enhanced of Fixed Protection (2012) will continue to receive the protection previously in place.

### Who is most likely to be affected?

The following members are most likely to be affected:

- members with long service and or significant promotional or pay rises
- high-earners and members with Enhanced Protection
- members retiring on redundancy grounds where some of the redundancy money is diverted into the pension scheme to provide additional benefits;
- members buying "Added Years" or "Additional Pension"
- members with special class status

## Examples

**Please note: **example calculations are intended to illustrate the method for calculating the annual allowance. This guidance does not provide exhaustive examples or illustrate all types of pension growth and in the case of the GP examples it has not taken into account the 'flexibility tests' which will be undertaken when the pensions agency tests for the annual allowance (AA).

The examples below demonstrate the potential tax charges for doctors, MHOs and GPs – including those buying "Added Years" or "Additional Pension". In all of the examples, CPI over the relevant period is assumed to be 2%. Actual CPI figures will need to be used in each appropriate year's test.

Where a tax charge is illustrated which exceeds £2000 the individual can elect that the 'scheme pays' the charge by actuarially reducing the pension payable at retirement. A charge of less than £2000 would need to be paid at the following tax assessment.

Extensive examples have been shown for the 1995 section of the NHS Pension Scheme – the impact will be similar for other schemes offering benefits similar to those shown. At the end of the document are some examples for the 2008 section which are similar in principle to those for the 1995 section. However, HMRC has advised that no account is to be taken of the Mandatory Lump Sum for those who chose to switch to the 2008 section and so the calculation is based on a multiplier of 16 only.

Hospital and Community doctors (1995 Section) provides benefits on a 1/80ths basis and cash at retirement of 3 times pension.

MHOs (1995 Section) receive benefits as for Hospital and Community doctors but each whole year in excess of 20 years as an MHO counts "double" when calculating pensionable service.

GPs (1995 Section) provides benefits based on career earnings and a retirement lump sum of 3 times pension. Pension is based on 1.4% of "dynamised earnings". Pensionable earnings are recorded each year and a revaluation factor is applied. The revaluation factor used to re-value earnings each year is 1.5% above CPI. The resulting figure is known as "dynamised earnings".

### 1995 Section examples

### Example 1a – Promotion from specialist registrar to consultant

Andy is promoted from specialist registrar (SpR) to consultant and his pensionable salary increases from £46,708 to £75,994. He is accruing benefits in the NHS Pension Scheme (1995 Section) and has completed 10 years’ membership at the end of the Pension Input Period prior to the current one.

**Step 1:** Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”:

Pension = (£46,708 x 10/80) = £5,839

“Inflation proof” = £5,839 x 1.02 = £5,956

Lump sum = 3 x £5,956 = £17,868

**Step 2:** Calculate pension benefit at end of the current Pension input Period:

Pension = (£75,994 x 11/80) = £10,449

Lump sum = 3 x £10,449 = £31,347

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£10,449 - £5,956) x 16 = £71,888

Lump sum = (£31,347 - £17,868) = £13,479

**Step 4:** Test against Annual Allowance:

Annual Allowance exceeded by: (£71,888 + £13,479) - £40,000 = £85,367 - £40,000 = £45,367.

So, need to look at any unused allowances over previous 3 years.

**Step 5:** Carried forward Annual Allowance from previous 3 years*:

Year X – 1 unused Annual Allowance: £34,933

Year X – 2 unused Annual Allowance: £36,111

Year X – 3 unused Annual Allowance: £37,232

Total unused allowance: (£34,933 + £36,111 + £37,232) = £108,276

**Step 6:** Calculate any tax charge payable:

Total Annual Allowance: £40,000 plus £108,276 = £148,276

Therefore, as £85,367 is less than £148,276, Andy will not be subject to any tax charge.

Note: Assuming Andy progressed through the Trainee pay points at a rate of one per year.

### Example 1b – As per Example 1a, but also buys £5,000 of Additional Pension (“AP”)

Let’s now assume that Andy wants to buy £5,000 of Additional Pension (i) by making a single lump sum payment, or (ii) by funding the Additional Pension via the payment of regular additional contributions over a period of 20 years.

**(i) Paid for by a single lump sum **

**Step 1:** As above

**Step 2:** Calculate pension benefit at the end of the current Pension Input Period:

Pension = £10,449 + £5,000 = £15,449

Lump sum = 3 x £10,449 = £31,347 [Note: AP does not include an automatic lump sum]

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£15,449 - £5,956) x 16 = £151,888

Lump sum = (£31,347 - £17,868) = £13,479

**Step 4:** Test against Annual Allowance:

Annual Allowance exceeded by: (£151,888 + £13,479) - £40,000 = £165,367 - £40,000 = £125,367. So, need to look at any unused allowances over Pension Input Periods ending in previous 3 tax years.

**Step 5:** Carried forward Annual Allowance from previous 3 tax years (as above): £108,276

**Step 6:** Calculate any tax charge payable:

Total Annual Allowance: £40,000 plus £108,276 = £148,276

Andy will therefore be liable for an AA charge of 40%* of (£165,367 - £148,276) = £17,091 x 40% = £6836.40.

Note: Assuming that Andy’s marginal income tax rate is 40%. Some of this may in fact attract a higher income tax rate.

**(ii) Paid for by regular additional contributions over a period of 20 years **

**Step 1:** As above.

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

Pension = £10,449 + (£5,000 x 1/20) = £10,699

Lump sum = 3 x £10,449 = £31,347 [Note: AP does not include an automatic lump sum]

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£10,699 - £5,956) x 16 = £75,888

Lump sum = (£31,347 - £17,868) = £13,479

**Step 4:** Test against Annual Allowance:

Annual Allowance exceeded by: (£75,888 + £13,479) - £40,000 = £89,367 - £40,000 = £49,367.

So, need to look at any unused allowances over Pension Input Periods in previous 3 tax years.

**Step 5:** Carried forward Annual Allowance from previous 3 tax years (as above): £108,276

**Step 6:** Calculate any tax charge payable:

Total Annual Allowance: £40,000 plus £108,276 = £148,276

Therefore, as £89,367 is less than £148,276, Andy will not be subject to any tax charge.

### Example 2a – Salaried GP, pensionable salary of £70,000 and £2.0m dynamised earnings

Belinda is a salaried GP with a pensionable salary of £70,000 and £2.0m dynamised earnings. She is accruing benefits in the NHS Pension Scheme (1995 Section).

**Step 1:** Calculate pension benefit value at end of the previous Pension Input Period and “inflation proof”:

Pension = £2.0m x 1.4% = £28,000

“Inflation proof” = £28,000 x 1.02 = £28,560

Lump sum = 3 x £28,560 = £85,680

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

Dynamised earnings: [£2.0m x (1 + (2% + 1.5%)) + £70,000] = £2.140m

Pension = £2.140m x 1.4% = £29,960

Lump sum = 3 x £29,960 = £89,880

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£29,960 - £28,560) x 16 = £22,400

Lump sum = (£89,880 - £85,680) = £4,200

Total = £26,600

**Step 4:** Test against Annual Allowance:

As £26,600 is less than £40,000, Belinda will not be subject to any tax charge.

### Example 2b – As per Example 2a, but has also been building up “Added years”

Let’s now assume that Belinda has been buying four years of “Added Years” over a period of 25 years from her 35th birthday. At the start of the relevant year she is aged 55 and has been paying for these Added Years for 20 years – her average earnings over this time was £70,000.

**Step 1:** Calculate pension benefit value at end of the previous Pension Input Period and “inflation proof”:

Pension = £2.0m x 1.4% = £28,000

“Added Years” pension = [4 x (20/25) x £70,000] x 1.4% = £3,136

“Inflation proof” = (£28,000 + £3,136) x 1.02 = £31,759

Lump sum = 3 x £31,759 = £95,277

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

Dynamised earnings: [£2.0m x (1 + (2% + 1.5%)) + £70,000] = £2.140m

Pension = £2.140m x 1.4% = £29,960

“Added Years” pension = [4 x (21/25) x £70,000] x 1.4% = £3,293

Total pension = £29,960 + £3,293 = £33,253

Lump sum = 3 x £33,253 = £99,759

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£33,253 - £31,759) x 16 = £23,904

Lump sum = (£99,759 - £95,277) = £4,482

Total = £28,386

**Step 4:** Test against Annual Allowance:

As £28,386 is less than £40,000, Belinda will not be subject to any tax charge.

### Example 3a – Self-employed GP, pensionable salary of £150,000 and £2.7m dynamised earnings

Colin is a self-employed GP with a pensionable salary of £150,000 and £2.7m dynamised earnings. He is accruing benefits in the NHS Pension Scheme (1995 Section).

**Step 1:** Calculate pension benefit value at end of the previous Pension Input Period and “inflation proof”:

Pension = £2.7m x 1.4% = £37,800

“Inflation proof” = £37,800 x 1.02 = £38,556

Lump sum = 3 x £38,556 = £115,668

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

Dynamised earnings: [£2.7m x (1 + (2% + 1.5%)) + £150,000] = £2,944,500

Pension = £2,944,500 x 1.4% = £41,223

Lump sum = 3 x £41,223 = £123,669

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£41,223 - £38,556) x 16 = £42,672

Lump sum = (£123,669 - £115,668) = £8,001

Total = £50,673

**Step 4:** Test against Annual Allowance:

Annual Allowance exceeded by: £50,673 - £40,000 = £10,673

So, need to look at any unused allowances over previous Pension Input Periods ending in 3 previous tax years.

**Step 5:** Carried forward Annual Allowance from previous 3 tax years:

Year X – 1 unused Annual Allowance: £1,041

Year X – 2 unused Annual Allowance: £2,696

Year X – 3 unused Annual Allowance: £4,296

Total unused allowance: (£1,041 + £2,696 + £4,296) = £8,033

**Step 6:** Calculate any tax charge payable:

Total Annual Allowance: £40,000 plus £8,033 = £48,033

Therefore, as £50,673 exceeds £48,033, Colin will be subject to a tax charge of £1,056 (40% of £2,640).

Note: Assuming that Colin’s marginal income tax rate is 40%. Some of this may in fact attract a higher income tax rate.

### Example 3b – As per Example 3a, but has also been building up “Added years”

Let’s now assume that Colin has been buying four years of “Added Years” over a period of 25 years from his 35th birthday. At the start of the relevant year he is aged 55 and has been paying for these added years for 20 years – his average earnings over this time was £150,000.

**Step 1:** Calculate pension benefit value at end of the previous Pension Input Period and “inflation proof”:

Pension = £2.7m x 1.4% = £37,800

“Added Years” pension = [4 x (20/25) x £150,000] x 1.4% = £6,720

“Inflation proof” = (£37,800 + £6,720) x 1.02 = £45,410

Lump sum = 3 x £45,410 = £136,230

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

Dynamised earnings: [£2.7m x (1 + (2% + 1.5%)) + £150,000] = £2,944,500

Pension = £2,944,500 x 1.4% = £41,223

“Added Years” pension = [(4 x (21/25) x £150,000] x 1.4% = £7,056

Total pension = £41,223 + £7,056 = £48,279

Lump sum = 3 x £48,279 = £144,837

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£48,279 - £45,410) x 16 = £45,904

Lump sum = (£144,837 - £136,230) = £8,607

Total = £54,511

**Step 4:** Test against Annual Allowance:

Annual Allowance exceeded by: £54,511 - £40,000 = £14,511

So, need to look at any unused allowances over Pension Input Periods ending in previous 3 tax years.

**Step 5:** Carried forward Annual Allowance from previous 3 years: Nil.

Payment of the additional contributions towards Added Years has meant that he has no unused Annual Allowance in any of the 3 previous years to carry forward.

**Step 6:** Calculate any tax charge payable:

Total Annual Allowance: £40,000 plus Nil = £40,000

Colin will therefore be liable for an AA charge of 40%* of (£54,511 - £40,000) = £5,804.40

Note: Assuming that Colin’s marginal income tax rate is 40%. Some of this may in fact attract a higher income tax rate.

### Example 4a – Consultant on £100,446, no pay rise, moving from Level 10 (Silver) CEA to Level 11 (Gold) CEA

Qamar is a senior Consultant accruing benefits in the NHS Pension Scheme (1995 Section).

At the beginning of the period, Qamar has completed 28 years’ pensionable service. His pensionable salary for that year is £100,446 and he has received a Level 10 (Silver) Clinical Excellence Award (CEA) of £46,644. By the end of the period, Qamar remains on £100,446 and receives a Level 11 (Gold) CEA of £58,305.

**Step 1:** Calculate pension benefit value at end of the previous Pension Input Period and “inflation proof”:

Pension = [£100,446 + £46,644] x 28/80 = £51,482

“Inflation proof” = £51,482 x 1.02 = £52,512

Lump sum = 3 x £52,512 = £157,536

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

Pension = [£100,446 + £58,305] x 29/80 = £57,547

Lump sum = 3 x £57,547 = £172,641

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period (which runs from 6th April to 5th April):

Pension = (£57,547 - £52,512) x 16 = £80,560

Lump sum = (£172,641 - £157,536) = £15,105

**Step 4:** Test against annual allowance:

Annual Allowance exceeded by: (£80,560 + £15,105) - £40,000 = £95,665 - £40,000 = £55,665

So, need to look at any unused allowances over Pension Input Periods ending in previous 3 tax years.

**Step 5:** Carried forward Annual Allowance from previous 3 tax years: Nil.

Qamar has exceeded the annual allowance in each of the previous 3 tax years and therefore has no unused allowance to carry forward.

**Step 6:** Calculate any tax charge payable:

Total Annual Allowance: £40,000 plus Nil = £40,000

Qamar will therefore be subject to a tax charge of 40%* of (£95,665 - £40,000) = £22,266.

Note: Assuming that Qamar’s marginal income tax rate is 40%. Some of this may in fact attract a higher income tax rate.

### Example 4b – As per Example 4a, but Qamar chooses to take early retirement at the end of the year

Let’s now assume that Qamar chooses to take early retirement at the end of the Pension Input Period, three years before his Normal Pension Age. His pension and lump sum will be reduced to take into account that it will be paid from an earlier age. The early retirement factor applied to his pension is 86.5% and to his lump sum is 91.0%.

**Step 1:** As above.

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

The calculation at the end of the Pension Input Period takes into account actual events that have occurred over the Pension Input Period, such as retirement.

Pension = [£100,446 + £58,305] x 29/80 = £57,547 x 86.5% = £49,778

Lump sum = 3 x £57,547 = £172,641 x 91.0% = £157,103

**Step 3:** Calculate increase in pension benefit value over the Pension Input Period (which runs from 6th April to 5th April):

Pension = (£49,778 - £52,512) x 16 = - £43,744

Lump sum = (£157,103 - £157,536) = - £433

Total = - £44,177 (i.e. negative)

**Step 4:** Test against annual allowance:

The total Pension Input Amount (ie the value of the pension benefits built up over the Pension Input Period) is subject to a minimum of £0. The amount of Annual Allowance that Qamar has used is therefore £0, and he will not be subject to a tax charge.

### Example 5a – Consultant psychiatrist, Mental Health Officer (MHO)

Natalie is a consultant psychiatrist accruing benefits in the NHS Pension Scheme (1995 Section). She spent one year in a non-MHO post before becoming an MHO. Natalie then remained as an MHO for a period of 20 years, so has worked a total of 21 years at the beginning of the Pension Input Period. Each whole year in excess of 20 years as an MHO counts “double” when calculating her pension.

At the start of the period, her pensionable salary is £83,829. She has worked 1 year as a non-MHO and 20 years as an MHO. At the end of the period, her pensionable salary has increased to £89,370 and a Level 1 Clinical Excellence Award (CEA) of £2,957 has fully worked through into her pension. She has worked 1 year as a non-MHO and 21 years as an MHO.

**Step 1:** Calculate pension benefit value at end of the previous Pension Input Period and “inflation proof”:

Pension = £83,829 x (20 + 1)/80 = £22,005

“Inflation proof” = £22,005 x 1.02 = £22,445

Lump sum = 3 x £22,445 = £67,335

**Step 2:** Calculate pension benefit at end of the current Pension Input Period:

Pension = (£89,370 + £2,957) x (22 + 1)/80 = £26,544

Lump sum = 3 x £26,544 = £79,632

**Step 3:** Calculate increase in pension benefit value over the year:

Pension = (£26,544 - £22,445) x 16 = £65,584

Lump sum = (£79,632 - £67,335) = £12,297

Total = £65,584 + £12,297 = £77,881

**Step 4**: Test against Annual Allowance:

Annual Allowance exceeded by: £77,881 - £40,000 = £37,881

So, need to look at any unused allowances over Pension Input Periods ending in the previous 3 tax years.

**Step 5:** Carried forward Annual Allowance from previous 3 years:

Year X – 1 unused Annual Allowance: £35,579

Year X – 2 unused Annual Allowance: £37,137

Year X – 3 unused Annual Allowance: £34,686

Total unused allowance: £35,579 + £37,137 + £34,686 = £107,402

**Step 6:** Calculate any tax charge payable:

Total Annual Allowance: £40,000 plus £107,402 = £147,402

Therefore, as £77,881 is less than £147,402, Natalie will not be subject to any tax charge.

### Example 5b – As per Example 5a, but looking at the next year

Let’s now look at the calculation for the following Period Input Period assuming that Natalie has not received any pay increase since the end of the previous Pension Input Period.

**Step 1:** Calculate pension benefit value at the end of the previous Pension Input Period and “inflation proof”:

Pension = (£89,370 + £2,957) x (22 + 1)/80 = £26,544

“Inflation proof” = £26,544 x 1.02 = £27,075

Lump sum = 3 x £27,075 = £81,225

**Step 2:** Calculate pension benefit at the end of the current Pension Input Period:

Pension = (£89,370 + £2,957) x (24 + 1)/80 = £28,852

Lump sum = 3 x £28,852 = £86,556

**Step 3:** Calculate increase in pension benefit value over the year:

Pension = (£28,852- £27,075) x 16 = £28,432

Lump sum = (£86,556 - £81,225) = £5,331

Total = £28,432 + £5,331 = £33,763

**Step 4:** Test against Annual Allowance:

As £33,763 is less than £40,000, Natalie will still not be subject to any tax charge.

### 2008 Section examples

### Example 1 - Consultant who receives an increment

Karen is a Consultant accruing benefits in the 2008 section of the NHS Pension Scheme. She has been working whole time for 30 years and as at 31 March 2014 her earnings are £89,370. By the end of the period she receives an increment giving her a pensionable salary of £94,911.

**Step 1**: Calculate the pension benefit value at the end of the previous input period and inflation proof:

Pension = £89,370 x30/60 = £44,685

Inflation proof (assume 2%) = £44,685 x 1.02=£45,578

Capital value £729,248 (16 X £45,578)

**Step 2**: Calculate the pension benefit value at the end of the current input period:

Pension = £94,911 x 31/60=£49,037

**Step 3**: Calculate increase in pension benefit value over the Pension Input Period

Capital value £784,592 (16 X £49,037)

Pension growth £55,344 (£784,592 - £729,248)

**Step 4**: Test against annual allowance:

Potentially Karen will have excess pension growth of £15,344 (£55,344 - £40,000)

**Step 5**: Carry forward annual allowance from previous 3 years:

Year X – 1 unused Annual Allowance: £35,579

Year X – 2 unused Annual Allowance: £37,137

Year X – 3 unused Annual Allowance: £34,686

Total unused allowance: £35,579 + £37,137 + £34,686 = £107,402

As £107,402 + £40,000 = £147,402 and is greater than £15,344 Karen will not incur a tax charge.

### Example 2 - GP in the 2008 section

Anne is a salaried GP with a pensionable salary of £70,000 and £2.0m dynamised earnings. She is accruing benefits in the 2008 section of NHS Pension Scheme.

**Step 1**: Calculate pension benefit value at end of the previous Pension Input Period and "inflation proof":

Pension = £2.0m x 1.87% = £37,400

"Inflation proof" = £37,400 x 1.02 = £38,148

**Step 2**: Calculate pension benefit at end of the current Pension Input Period:

Dynamised earnings: [£2.0m x (1 + (2% + 1.5%)) + £70,000] = £2.140m

Pension = £2.140m x 1.87% = £40,018

**Step 3**: Calculate increase in pension benefit value over the Pension Input Period:

Pension = (£40,018 - £38,148) x 16 = £29,920

**Step 4**: Test against Annual Allowance:

As £29,920 is less than £40,000, Anne will not be subject to any tax charge.