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Financial Tips
Helping Dentists & Doctors Achieve
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Welcome to Financial Tips!
Published by Perspective (North East) Ltd and written by Financial Planners Ray Prince and Graeme Urwin.
Approximate time to read: 6 minutes
In This Issue:
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Feature Article: NHS Pension - Retirement Flexibilities & Partial Retirement
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Hot Topics Q & A: Lifetime Allowance (LTA), Has It Really Been Abolished?
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NHS Pension - Retirement Flexibilities & Partial Retirement
 The Government’s response to a recent consultation confirms the new retirement flexibilities along with changes to address the pension input issues caused by inflation (note that some of this article does get a bit technical, which is important to explain the full context
of the changes).
The Government has published the response to the consultation on amendments to the NHS pension scheme. The changes provide new retirement flexibilities for members of the 1995 scheme and also intend to correct some of the issues caused by the inflation offset used in the pension input calculations, with repsect to the annual allowance.
The consultation outcome confirms that the changes will go ahead as intended with some amendments to implementation dates. The consultation response also acknowledged that more detailed support and information needs to be made available to help members understand the new options.
In the meantime, with some changes taking effect from April 2023, members may be seeking help in understanding the changes.
Let's take a look.
New Retirement Flexibilities
The new flexibilities are part of a plan to aid staff retention by offering options that will remove some of the issues within the 1995 section of the scheme that appears to encourage employees to retire early.
In some situations, they can also help manage the pension inputs for those concerned by the annual allowance.
From April 2023 - Retire and Return
Previously, members who took their 1995 benefits were not allowed to build up any further pension in the 2015 scheme. Any further work must be on a non-pensionable basis.
From 1 April 2023, this was amended. Members can retire and take their full benefits from the 1995 scheme, then return to work after a break of at least 24 hours.
They can then re-join the 2015 scheme and continue to build up benefits.
This is an important change because there are no late retirement factors in the 1995 scheme and so, currently, no incentive to continue in the 1995 scheme beyond age 60.
Many employees therefore currently choose to retire at 60. This will remove a key disincentive to work beyond age 60.
However, it may mean those taking their 1995 pension benefits will be subject to high marginal rates of income tax if they are taken before they are actually needed where the member continues in employment.
For higher earners, taking the 1995 benefits can help reduce the impact of high pension inputs and annual allowance charges as this will mean that from then on there will no longer be any input to the scheme.
They will, of course, lose the benefit of any final salary increases on their 1995 benefits but the pension in payment will increase with inflation.
The previous restriction for ‘retire and return’ workers meant members of the 1995 scheme were limited to working 16 hours a week for the first month after re-employment.
This restriction has been removed and members simply need to take a 24-hour break and can then start building 2015 benefits immediately.
Members will, however, be required to enter a new contract of employment. Whilst this will need to be agreed locally with their employer the Government’s response states that it would “strongly encourage employers to offer staff the same terms and conditions on this new contract should they decide to retire and return”.
From October 2023 - Partial Retirement
This new option allows those who have reached the normal minimum retirement age to take between 20% and 100% of their 1995 pension benefits in one or two stages without having to leave their job.
They can take the benefits from the 1995 scheme, continue to work and build up benefits in the 2015 scheme.
To take advantage of this option employees must reduce their pensionable pay by at least 10%. GPs and other practitioners must reduce their NHS commitments by at least 10%.
Where benefits are taken before the normal pension age for the scheme (age 60 for most but 55 for certain occupations) the usual early retirement reduction factors will apply.
As with the retire and rejoin options outlined above, as well as providing additional flexibility this can help members to control any annual allowance charges.
However, as above, if pension income is taken when it is not needed it may mean it is subject to high marginal rates of income tax.
Note that both options are already available for members of the 2008 and 2015 scheme, but most members at or near their normal retirement age now will have the vast majority of their benefits in the 1995 scheme.
Changes to the Scheme rules address inflation from April 2023
The changes intend to correct the fact that there is a disconnect between the inflationary offset used in the tax calculations for the pension input calculation and the one used to revalue benefits in the schemes.
Without the amendment, the steep rise in inflation would have created some very high pension inputs, which are arguably unfair as the pension input is only supposed to represent the increase in benefits above inflation.
This has already caused issues for the pension inputs for the 2021/22 tax year, but it would have been significantly worse for pension inputs in the 2022/23 tax year if nothing had been done.
To resolve this, the effective date of the revaluation of Career Average Revalued Earnings (CARE) schemes was moved from 1 April to 6 April with effect from 6 April 2023.
For the 1995 scheme and 2008 schemes the date used to revalue lifetime earnings, i.e. the ‘dynamizing factors’, was also moved from 1 April to 6 April.
The changes have the effect of aligning the CPI values. This will also mean that the inflationary part of the pension ‘growth’ will now move into the next tax year.
So, rather than the increase being reflected in a 2022/23 pension input it will now move to the 2023/24 tax year.
Tax year 2022/23 will be a transitional year which means, effectively, there will be no revaluation element within the calculations and so should mean lower pension inputs.
For practitioners in the 1995 or 2008 scheme this may lead to negative inputs for tax year 2022/23.
They will also have inputs in the 2015 section and the good news since the Budget is that positive inputs in one section of the scheme can now be offset against negative inputs in another section. This will really help with annual allowance calculations and inputs!
Note, however, there is no change to the calculation for non-practitioner members in the final salary sections of the scheme.
The pension inputs will still be based on any increases in their final salary between the start and the end of the pension input periods.
In Summary
As the consultation response notes, the additional retirement flexibilities are generally welcomed and should provide some help with staff retention.
The ability to take benefits from the 1995 section of the scheme and continue to accrue benefits in the 2015 scheme removes a strong incentive to retire at age 60.
For high earners, the new flexibilities may provide an option for some to help reduce the pension inputs and thus reduce annual allowance tax charges.
The changes to the scheme rules in relation to inflation helps resolve the most recent issue in relation to pension inputs, however, it doesn’t address the fundamental problem, i.e. that many senior NHS staff regularly exceed the annual allowance, although the increase to £60,000 pa from 23/24 is very welcome (note that the taper still applies).
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Hot Topics Q&A: Lifetime Allowance (LTA), Has It Really Been Abolished?
Every week we receive questions from clients regarding all aspects of their financial planning. So, rather than keep the answers to ourselves (and clients) we publish one key topic each issue.
Q. Aged nearly 60, I have built up an annual pension in the 1995 scheme of approximately £54,500 pa, plus £6,150 pa in 2015 (both amounts take into account the McCloud remedy).
What impact will this have on my pension now that the LTA has been abolished? (I intend to take both pensions at 60 and have no pension protections in place).
A. The first point to note is that the lifetime allowance charge has been reduced to 0% from April 2023. It's expected to be removed altogether from April 2024, although no legislation for this has been published as yet.
The Chancellor certainly took most observers and experts by surprise in the Budget when he announced that the LTA was being removed! Many thought it would increase from £1,073,100 to £1.8m, but he definitely went may beyond that.
To answer your question, let's look at the numbers, pre and post Budget.
Pre
1995 - £1,253,500 value for LTA purposes
2015 - £86,100 value
Total = £1,339,600
1995 pension paid: £54,500 - £2,082 LTA tax charge = £52,417 pa
Plus lump sum of £163,500
2015 pension paid: £4,305 (pension reduced as taken 7 years early) - £1,057 LTA tax charge = £3,247 pa
Total = £55,664 pa
Post
1995 - £54,500 + lump sum of £163,500
2015 - £4,305
Total = £58,805 pa
So, the difference is £3,141 pa, which at 40% tax is a reduction of £157 per month after tax.
Please send us your questions! It's easy to do. Just send an email to us here (and if we publish it we'll make it anonymous).
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Wrap-Up - We Are All Unique!
 For a number of years, our family have been on a journey of discovery and it culminated in both our daughters being diagnosed as autistic last year.
Autism Spectrum Disorder (or ASD, as it's known) covers a huge spectrum and can be defined in various ways:
Autism spectrum disorder (ASD) is a developmental disability caused by differences in the brain. People with ASD often have problems with social communication and interaction, and restricted or repetitive behaviors or interests. People with ASD may also have different ways of learning, moving, or paying attention.
(I prefer to replace the word 'disorder' with 'difference')
The NHS says Autistic people may:
- Find it hard to communicate and interact with other people
- Find it hard to understand how other people think or feel
- Find things like bright lights or loud noises overwhelming, stressful or uncomfortable
- Get anxious or upset about unfamiliar situations and social events
- Take longer to understand information
- Do or think the same things over and over
As a family we have had to make many adjustments, including changing schools (more than once).
And whilst there can be negatives, there's also some amazing positives, as ultimately our daughters' brains are wired in a different way and so they are able to see situations differently from many 'neurotypical' people.
Autism is common, with the National Autistic Society estimating 700,000 people are on the autistic spectrum in the UK. Whilst there is no official count of people who are autistic this is a well-recognised figure and if anything is likely to be conservative.
Some well known people with autism are:
- Greta Thunberg
- Elon Musk
- Christine McGuinness
- Chris Packham
- Sir Anthony Hopkins CBE
- Melanie Sykes
Let me leave you with a poem from a 12 year old ASD girl, who won a competition with a powerful description of being autistic:
"Take a seat and sit with me
I want to talk about ASD
If you don't mind I'd like to explain
A little thing called autism and how it affects my brain
It can make me anxious, angry and afraid
But this stays in my head, on my face it's not displayed
I may seem heartless and question your meanings
But it takes me a little longer to process the feelings
Take a seat and sit with me I want to show you ASD
A boy sitting quietly is all you see
But inside my mind I am far from free
My thoughts collide, my senses take over
I become overwhelmed by the smallest sound
Clicking pens, ticking clocks
That boy's chair and the way it rocks
All different smells attacking me
The perfumes, the coffee, the teacher's tea
Take a seat and sit with me
But not too close, I have ASD
I try to be social, I try to fit in
I come across rude, I can never win
I am very literal and straight to the point
If you want the truth I won't disappoint
When my brain is overloaded I sometimes lash out
My control fades, I scream and shout
I get confused and it all spills out
Intense emotions all trapped inside
Finally have nowhere to hide
Take a seat and sit with me I want to tell you about ASD
Please understand I am not to blame I've just got an atypical brain
But it's not all doom and gloom
I'm often the sportiest boy in the room
I'm quirky, unique, kind and caring
I'm loyal, protective and always sharing
I'm obsessed with x box and all things green
I'm the youngest trendsetter you've ever seen
Take a seat and sit with me"
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Comments made are based on current tax law and may, (in fact almost certainly will), change in the months/years
ahead. Material supplied has been carefully checked for accuracy but no responsibility can be accepted for
inaccuracies or errors or from subsequent use of this material.
Specific professional advice must always be sought based on your own individual circumstances. As always, the
buck stops with you. The information contained within this email is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.
We recommend you take independent advice before making any investment decisions. The writers do not accept any responsibility for any loss suffered by readers as a result of any such decisions.
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