Lifetime Allowance

Reduced Lifetime Allowance: Fixed Protection and Benefit Accrual in the NHS Pension Scheme

Click here for more information on the December 2012 update to allowances

The Standard Lifetime Allowance (LTA) reduced down to £1.5 million from 6th April 2012. This represents a reduction of £300,000 from the previous LTA of £1.8 million. Whilst the Government will review the LTA again in 2016, there is no guarantee that it will increase in the future. The LTA is the total amount of tax privileged pension savings that you are allowed to accumulate within registered pension schemes. Once benefits are taken that exceed the LTA then a tax charge is levied. The tax charge is 55% if the excess if taken as an immediate lump sum. If the excess pension savings are used to provide pension income then the tax charge is reduced to 25%, although it should be borne in mind that the pension income will then be subject to tax at your marginal rate.

Any existing entitlement to enhanced or primary protection from A-day will be honoured.

Strategies for Managing the Lifetime Allowance

It is important to plan ahead in order to manage the potential impact on your pension savings from the Lifetime Allowance. This applies equally if you are subject to the standard lifetime allowance or have a higher personal allowance due to eligibility for; primary, enhanced or fixed protection. Whilst it may not necessarily be a complete disadvantage to incur a Lifetime Allowance tax charge, it would generally be preferable to avoid such a charge if at all possible.

The simplest way to manage the Lifetime Allowance is to regularly monitor the level of your pension savings and the growth achieved on these savings. In respect of the NHSPS it is important to monitor future changes in pensionable earnings, as they are likely to be key consideration for management of the Lifetime Allowance.

Where it is highly likely that your projected pensions savings will exceed the Lifetime Allowance available at your normal retirement age, then certain decisions can be made to minimise the resulting tax charge. These include the following key strategies:-

Opting out of the NHSPS.

It is possible to submit a written election to opt-out of the NHSPS scheme for future service. This will result in you being treated as a deferred member of the scheme, much in the same way as if you had left pensionable service with your employer.

In addition to the NHSPS pension benefits, any decision to become a deferred member has a significant impact on a number of valuable associated benefits. Furthermore, these change once you have been a deferred member for more than a period of 12 months.

The key differences can be summarised as follows:-

Death within 12 months of leaving scheme Death after 12 months of leaving scheme
Lump sum of three times annual pension Lump sum of three times annual pension
No six months short term pension payable No six months short term pension payable
Widow’s pension of 50% of tier two Ill Health retirement Pension Widow’s pension of 50% of members pension as at date of death (no enhancement)
Widower’s or partner’s pension of 50% of Ill health retirement Pension (post 6.4.88 membership only) Widower’s or partner’s pension of 50% members pension as at date of death (post 6.4.88 membership only)
Dependant’s pension of 25% of tier two Ill Health Retirement Pension (up to maximum of 50% for two or more dependants) Dependant’s pension of 25% of tier two Ill Health Retirement Pension (up to maximum of 50% for two or more dependants)

It should also be understood that for a deferred member any future ill-health retirement is only paid if the deferred member is unable to undertake any regular employment and no IHRP enhancement is provided. The rules on the payment of a serious ill-health lump sum are no different for deferred members.

Consequently, any decision to opt-out of future service should not be taken lightly. It is unlikely to be in the best interests of the vast majority of scheme members to make the decision to opt-out. In general terms therefore, it should be noted that opting-out is unlikely to be in your financial interest. Accruing additional pension benefits, albeit subject to a possible Lifetime Allowance tax charge, is normally a better option than opting-out. Any decision to opt-out should therefore be an exception rather than the norm.

Maximising your Pension Commencement Lump Sum (PCLS) on retirement.

Due to the different ways that pension and lump sums are valued for testing against the Lifetime Allowance, selecting a higher PCLS usually means that less of the available Lifetime Allowance is used up at the time of taking your pension benefits. Tools are available that allow you to calculate the maximum PCLS that you can select and the pension exchanged as a result.

Allocation of Pension to a Dependant.

Subject to certain conditions, you may give up (allocate) part of your pension to provide for a pension, to be paid after your death, to another person. That person may be a spouse, civil partner, nominated partner or someone who is dependent upon you for support. Choosing to allocate will result in a reduction to your retirement pension. If an allocation is made in favour of the spouse, civil partner, or nominated qualifying partner, they will get the allocated pension as well as their survivor’s pension from the scheme.

To apply to allocate part of your pension in this way you must be in good health and will need to have a medical examination at your own expense. It is not necessary for the beneficiary to be medically examined, but you should satisfy yourself that the person is likely to live as long as you. This is because of the fact that If the beneficiary dies before you, the allocation cannot be cancelled under any circumstances, and the allocated part of the pension would be lost forever. You will only be allowed to cancel or change an application to allocate a pension before it is accepted by the NHS Pensions Agency.

It is not possible to allocate more than one third of your pension and any pension for the beneficiary must be, at least, £260.00 a year. Your pension (post allocation) must also exceed the beneficiary’s allocated pension. The amount of pension the beneficiary will receive depends on your age, the beneficiary’s age and whether the individual is male or female.

This course of action results in a reduction in the ‘deemed’ value of your pension for the purposes of testing against the Lifetime Allowance. However, an allocation of pension to your beneficiary should only be exercised with extreme caution, after full consideration of the key issues.

Taking pension benefits early and leaving NHS service.

It is possible to take your NHSPS early from age 55 onwards. Your pension benefits are reduced by an actuarial factor for each year that benefits are taken early. The reduction is applied due to the fact that your pension is paid early and therefore over a greater number of years. You will also cease to accrue future pension benefits. Taking benefits early will reduce the amount of the Lifetime Allowance used, when compared with unreduced benefits at normal retirement age. Future pension savings are also not accumulated. The key decision is therefore foregoing future pension savings in favour of early payment of scheme benefits.

Taking pension benefits early and remaining in NHS service.

It is also possible to take your NHSPS benefits but then return to employment with the NHS. This is sometimes referred to as ‘24 hr retirement’ because a period of at least 24 hours must have elapsed before you are allowed to return to work. Furthermore, during the first month after returning to work you will not be allowed to work more than 16 hours in any one week.

It is essential to bear in mind that permission must be obtained, in writing, from your employer confirming that they are happy to agree with this arrangement prior to making a decision.