3 reasons to have a pension pot over the allowed limit

From the 6th April 2018, doctors and dentists who have more than £1,030,000¹ in their pension pot are very likely to be hit with an unwelcome tax bill. Even medics who don’t think their pension is anywhere near this figure could be caught unawares.

Surely then it’s better to avoid exceeding this lifetime pension allowance limit than pay more tax…or is it?

3 reasons to exceed the lifetime pension allowance

Who is likely to exceed the lifetime pension allowance limit?

First and foremost, because of the way the NHS Pension Scheme has to value your pension against the lifetime pension allowance (LTA), a large number of NHS doctors and dentists will find their pension pot at retirement at least close to, if not over, the new LTA limit. This particularly applies to those medics who have joined the 2015 NHS Pension Scheme early in their career and plan to work through to their normal retirement age.

Secondly, remember that the actual value of your pension is only measured at the point at which you take your pension benefits (and after any penalties have been applied). It means that even if your pension isn’t over the LTA mark now, it could very well be when you retire.

So why is having more than the lifetime pension allowance in your pension a good thing?

Contrary to a lot of recent press coverage, there are a number of valid reasons why you would want your pension to be in excess of the lifetime pension allowance. Here are three of them:

Reason 1: Using the NHS Scheme Pays method to pay the tax charge you incur when you breach the lifetime pension allowance limit

With the Scheme Pays method, the NHS in effect loans you the money to pay your additional tax bill, recouping its money by reducing your pension income when you retire. The resulting penalties which are applied to your pension reduce the size of your pension pot to under the lifetime allowance threshold.

Reason 2: You want to retire before you’re in your late 60s

If you do, you’re not alone! The retirement age for members of the 2015 NHS Pension Scheme is linked to the state retirement age (currently 67). If you draw your pension before this age, you’ll incur hefty penalties.

In order to cover the impact of your early retirement penalties, you may require a pension in excess of the lifetime allowance. In short, the earlier you wish to draw your pension benefits, the bigger your pension fund needs to be.

Reason 3: Maximising your tax free lump sum on retirement

NHS Pension Scheme members can give up some of their pension income when they retire for an increased tax free lump sum.

For your lifetime pension value, the two figures – your pension income and tax free lump sum – are calculated differently. If you increase the tax free element and reduce your pension income, the size of your pension pot for LTA purposes will be smaller than if you had kept your pension income at its original amount.

As with most things financial, the headline seldom tells the whole story. The size of your pension fund, and the answer to the ‘if, when and how’ it breaches the prevailing lifetime pension allowance question, depends, for the most part, on:

  • How you intend to take your NHS Pension benefits
  • At what age you want to retire
  • How you plan on paying any tax generated.

Will your pension breach the lifetime pension allowance and, if so, how does it affect your retirement plans? Let us know by adding a comment below.

¹ The lifetime pension allowance limit is £1,000,000 until the 5th April 2018. From the 6th April 2018, this limit will increase in line with the consumer price index (CPI) to £1,030,000.

8 thoughts on “3 reasons to have a pension pot over the allowed limit

  1. John West

    Hello Max!

    I’m about to apply for EVR in later part of 2016, partly influenced by the pension tax nightmares we discussed previously.

    May I challenge point 3 in your article (‘Reason 3: Maximising your tax free lump sum on retirement’).
    It’s no longer called Tax free LS- its now called Pension Commencement and that’s because we’re almost certain to be hit by a new Whammy from the Treasury- namely loss of the 25% tax free privilege, and with that the ability to commute, in order to fill the omni-shambles #2 budget £4 billion black hole.

    If not 2016 it’ll happen in 2017. So I’m not sure you should be giving this particular piece of advice to the youngsters who have many more austerity budgets to survive!

    1. Max Spurgeon

      Hello John. You are correct, the pension commencement lump sum is indeed the right term for the tax free cash element, but it is generally known as the latter. This of course may change if you are right in your assumptions. The removal of the tax free element rumour has been in circulation for as long as I can remember, but I am sure it is being reviewed. I happen to to think they are more likely to move to a flat rate of tax relief first, but this is merely my specualation.
      The article is not meant as advice, and we have used the current rules that are in place, but as you are well aware keeping abreast of all the changes is difficult. Good to hear from you. Kind Regards Max

  2. Tim

    Interesting ways to consider the life time allowance but apart from 2 are these really reasons to breach the allowance?
    3 looks like a way the avoid the tax charge if needed and 1 a less painless delayed way of paying the hefty tax charge?

    1. Max Spurgeon

      Hello Tim. I could agree with you. After speaking to many of my clients, they view the LTA as a line in the sand which they should try and reach but not cross. The article is just trying to highlight some circumstances where you may wish to cross the line. Kind Regards Max

  3. laurence Wallis

    i have just retired. My pension pot exceeds my LTA. I have just found out my pension and lump sum are being reduced – as expected but my survivor pension is being disproportionately reduced – no longer half my pension. I have been told this reflects agreement between HMRC and the DOH. is this true and is there anything I can do?

    1. Max Spurgeon

      Hi Laurence,

      It does sound a little odd, when you commute income for a higher tax free element the survivor pension is not impacted. I think this would need further investigation and outside the scope of a blog. I am happy to have a look at it for you if you wish. Please email me. If the issue is obvious then I will get back to you.

      Kind Regards

      L&M Team

  4. Timmy

    I am in both the 1995 (frozen) and the 2015 scheme and have a private pension. My combined hypothetical annuity cost is over £1.2m, does this mean I owe tax? Thanks

    1. Owen Beswick

      Hi Timmy

      No it doesn’t is the short answer! I’m assuming you got the “hypothetical annuity cost” from your Total Rewards Statement (TRS). To calculate the value of your NHS pension benefits you need to multiply your pension by 20 and add in your lump sum to get a “figure” (pension amount available on the TRS). This figure is the amount that is measured against the lifetime allowance (LTA) and determines whether you have a tax bill at retirement or not. However you do also have to add in the value of your personal pension to the “figure” referred to above. It’s this combined figure that is then measured against the LTA.

      You may have “annual allowance” issues (not just lifetime allowance issues) and as such, you should speak to us as soon as you are able.

      Best wishes


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