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I’d assumed that as I remain young (in my head at least), I wouldn’t need to think about my pension for quite a while – after all, I’ve only been paying in since 2000 and, despite the changes to the scheme in 2015, everything has been quite straightforward.
I mean, it’s career averaged but only on my associate specialist salary, and the years I’ve accrued on the 1995 scheme would continue to count towards my final salary. After all, we are reminded from all sides that even the new scheme is ‘gold-plated’ despite us paying more for every pound back than some of our colleagues due to the tiered contribution rates.
I had no idea that a tax on pensions was a possibility and therefore have not made any provision for this. (My saving has been for university fees and weddings!)
I find the whole thing confusing and the normally very helpful trust pensions department is not able/allowed to offer any help. Having largely only paid tax via PAYE, to come to the end of my career and have to work out what I owe feels daunting.
Having not saved for the possibility of large tax bills, the only option available to me is to use my pension lump sum. It has made me consider – at what point does remaining at work become beneficial?
There is so much to consider: annual allowance, lifetime allowance, tapering, threshold income and adjusted income. I did not think I would have to think about this for some time and, when the time came, I thought the NHS Pensions team would organise everything.
But then I got worried, hearing about colleagues being lumbered with five-figure tax bills. So I decided to look a bit more in to it. I do my own tax returns and have relatively simple financial affairs– it is just numbers after all, so how hard could it be?
After eight hours of wading through old payslips, total reward statements, past tax returns and cross-referencing an Excel spreadsheet with the guidance from HMRC, gov.uk, and the pensions part of the BMA website, it dawned on me why there were 60 different click-through boxes on various elements of pensions.
It is remarkably complex.
I had heard that accountants were referring doctors to independent financial advisers, and independent financial advisers were referring doctors to accountants, and some had even retained the services of actuaries to get an answer to ‘what does this mean for me?’.
I had a conversation with the BMA pensions team and the complexity of the situation for those in defined benefits pension schemes (predominantly public sector schemes like the NHS pension) is well recognised. It is almost as if the system has been deliberately designed to catch the unwary, or those who are less dogged in pursuing the answer.
It turns out that, in order to avoid getting caught in the web of tapering annual allowance and unexpected tax bills, I need to try to keep my threshold income below £110,000 – that is total NHS pay, whether pensionable or not, plus any other income, less employee pension contributions and allowable expenses.
I must also keep my adjusted income (factoring in pension growth and input) below £150,000 if the threshold income is exceeded. If my adjusted income exceeds this then the amount my pension pot can grow in a tax-free fashion (the annual allowance) shrinks (tapering), and if I breach this tapered amount then I can face a sizeable tax bill.
As the Total Reward Statement available from ESR doesn’t include pension growth within the glossy pie charts, it is a good idea to request a pensions statement from NHS Pensions when any changes to pay are on the horizon – back pay, increasing or decreasing hours or increments.
Any income change can trigger the annual allowance charge – not just pensionable NHS pay, and knowing your pension growth is a key component in working out your specific situation.
The risk of this may make taking on additional work such as Waiting List Initiative sessions, additional, regular or ad hoc PAs, or responsibility payments for medical management roles increasingly unattractive, with the potential of breaching the annual allowance and a large tax bill on the horizon.
While your pay would nominally increase, if you incurred an additional (on top of the normal tax you pay) tax bill because you crossed your annual allowance threshold, what would your effective take-home rate be on that extra work? In some circumstances people may be taxed an eye-watering 70% on additional work. Passing up the offer of that small reward to do something else with my time doesn’t seem a great sacrifice.
So, what can you do?
If you are on the 2008 pension scheme I highly recommend using the BMA’s new BMA Goldstone Pensions Modeller which will calculate, to a good degree of accuracy, any future annual allowance charges.
You should also consider seeking independent financial and/or tax advice from an adviser who fully understands the subtleties of the NHS pension scheme so you can try and manage any nasty surprises on the horizon.
And please think about all the extra work you do. I am aware that as a career-grade doctor this impacts me less than it might others, but nevertheless it has been a source of frustration and concern.
Amit Kochhar is the SAS doctor committee chair
Many thanks for this summary
Thank you very much for providing this very useful information
Hi, thank you for comments. I have been on retirement course, met my accountant, had independant adviser meeting and long chat with NHS pension agent. It's more complicated than we think particularly if we have additional income eg from few properties rent. It will discourage us from taking any work in NHS after retirement.