How a change in NHS Pension rules affects medics

A change to the NHS Pensions’ Scheme Pays rules from the 2017-2018 tax year potentially reduces the income tax bill of many high earning NHS Pension Scheme members by thousands of pounds. Sounds great but what’s the catch?

How a change in NHS Pensions rules affects NHS doctors and dentists

What is NHS Pensions’ Scheme Pays?

In short, NHS Pensions’ Scheme Pays is all about tax. Specifically, it’s about the Annual Allowance tax charge that many active members of the NHS Pension Scheme now have to pay, thanks to the new Tapered Annual Allowance rules. Ongoing tax penalties for high earning medics >

Two ways to pay your Annual Allowance tax charge

It is your responsibility to pay any Annual Allowance charge to HMRC and there are two ways you can do this. Paying your unexpected pension tax bill: Your options >

Option 1

Pay the tax charge directly to HMRC via self-assessment. This will need to be paid by the 31st January following the end of the tax year in which the charge arises. For example, if the charge arises in 2017-18 the tax will need to be paid by 31st January 2019.

Option 2

Share the responsibility with the NHS Pension Scheme. This is known as ‘Scheme Pays’.

If you ask the NHS Pension Scheme to pay the charge, via your 1995/2008 or 2015 Section, your NHS pension benefits will be reduced. NHSPS must receive your request or ‘election’ by the following dates: You may need to scroll left and right if you’re viewing the table below on a small screen.

Annual Allowance Charge In Deadline
2017/2018 31 July 2019
2018/2019 31 July 2020
2019/2020 31 July 2021
2020/2021 31 July 2022
2021/2022 31 July 2023

There are two types of Scheme Pays: Mandatory Scheme Pays and Voluntary Scheme Pays. Certain criteria must be met in order to determine which type of Scheme Pays to apply for.

So how have the NHS Pension rules changed?

Up until 2016-17, the following conditions had to be met for NHS Pensions to accept a Scheme Pays election:

Mandatory

  1. The election is received by the NHS Pension Scheme by the deadline
  2. The pension input amount in the 1995/2008 or 2015 Section is more than the standard Annual Allowance
  3. The Annual Allowance charge for the tax year is more than £2,000 (across all schemes)

Voluntary

  1. You are a member of both the 1995/2008 and 2015 Section
  2. The election is received by the deadline
  3. The total pension input amount in the 1995/2008 and 2015 Section is more than the standard Annual Allowance
  4. The Annual Allowance charge for the tax year is more than £2,000 (across all schemes)

The key changes for 2017-18 onwards are around Voluntary Scheme Pays and, assuming you do not meet the conditions for Mandatory Scheme Pays, they are as follows:

  1. Voluntary Scheme Pays will be available to members who have an Annual Allowance tax charge (across all pension schemes) and who have a reduced, tapered or alternative Annual Allowance i.e. the pension input does not have to exceed the standard Annual Allowance only
  2. The Annual Allowance charge (across all pension schemes) no longer has to exceed £2,000 i.e. the charge can be less than £2,000

Sounds complex? It sure is! So, let’s look at an example of how the change might impact an individual doctor or dentist.

An example

Donna is a member of the NHS Pension Scheme. She transitioned to the 2015 Section in April 2015 and has deferred 1995 Section benefits. She has a pension input amount in 2017-18 of £100,000. She has a reduced Tapered Annual Allowance of £10,000 and pays the 45% higher rate of income tax.

Her financial adviser calculates that she has an Annual Allowance charge to pay on the pension input amount of £90,000 (£100,000 – £10,000). This tax charge amounts to £40,500 (£90,000 x 45%).

Mandatory Scheme Pays will only cover the Annual Allowance tax charge on the pension input amount that is more than the standard £40,000 Annual Allowance. It means Donna can only make a Mandatory Scheme Pays election of £27,000 (£100,000 – £40,000 = £60,000 x 45%).

Prior to 2017-18, Donna would have had to pay the remaining tax due (£13,500) directly to HMRC. Now, thanks to the rule changes from 2017-18, Donna can ask NHS Pensions to pay the remaining £13,500 via a Voluntary Scheme Pays election.

Effectively, she has reduced her income tax bill on 31st January 2019 by £13,500.

Is NHS Pensions’ Scheme Pays right for you?

The answer will depend on your own set of circumstances. If you choose to make a Scheme Pays election, you need to understand the impact it will have on your NHS Pension benefits when you retire.

  • If you’re a 1995 Section member, your pension and lump sum will be permanently reduced when you retire.
  • If you’re a member of the 2008 Section and/or 2015 Section, your pension will be permanently reduced when you retire.

You must also make sure that any interest and/or penalties that HMRC may charge for late payment of the tax is settled.

In simple terms, under the Scheme Pays facility, NHS Pensions lend you the money to pay your Annual Allowance tax charge which you will need to pay back, with interest, when you retire.

At retirement, the total amount owing, inclusive of the interest, is converted into a debit amount to be permanently deducted from your NHS pension benefits, using factors set out by the Scheme Actuary.

How does Scheme Pays affect your NHS pension benefits?

Let’s return to Donna’s example to see how her Scheme Pays election affects her final NHS pension benefits.

Donna is 50 years old and is a transitional member of the Scheme i.e. she is a deferred member of the 1995 section and a current member of the 2015 Section. As a reminder, the Normal Retirement Age (NRA) of the 1995 Section is age 60; for the 2015 Section it is age 67.

Donna’s total pension input in 2017-18 was £100,000, of which £35,000 was in relation to the 2015 Section and £65,000 in relation to the 1995 Section.

The reduction in her pension benefits can be estimated as follows: You may need to scroll left and right if you’re viewing the table below on a small screen.

NHS Pension Scheme Reduction in Pension Now (gross pa) Reduction in Lump Sum Now Reduction in Pension at NRA (gross pa) Reduction in Lump Sum at NRA
1995 Section £1,539 £4,617 £2,460 £7,380
2015 Section £1,376 N/A £3,050 N/A
Both Scheme's Combined £2,915 £4,617 £5,510 £7,380

Notes:
1. The factors used are produced by the Scheme Actuary and are only a guide
2. The interest rate in excess of inflation can be altered. Currently, it is 2.8%
3. CPI will alter
4. Bank of England’s target rate of inflation has been used in the above calculations (2%)
5. No reduction will apply to benefits payable to spouse or dependents on death
6. The deductions made for using the Scheme Pays facility is applied prior to the Lifetime Allowance Test

So should you or shouldn’t you choose the Scheme Pays option?

Recent changes to pension legislation are having an increased impact on members of the NHS Pension Scheme. Annual Allowance issues are just one area.

The change in rules to the Voluntary Scheme Pays facility allows you to ask NHS Pensions to pay more of your Annual Allowance tax charge from 2017-18 onwards than was previously the case.

If you choose the Scheme Pays option, it will reduce / eliminate any immediate income tax burden, but you will be borrowing the money to pay the tax charge and accruing interest on the loan. This strategy could have a significant impact on your pension benefits in retirement and requires careful consideration.

Remember, your NHS pension is an index-linked government backed pension income payable in retirement for the rest of your life.

There is no ‘one size fits all’ solution here. It is essential that you seek assistance from a specialist independent financial adviser so that you are clear of your options and can make an informed decision about the right course of action for you.

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