On April 6, the current complex web of pensions regulation will be replaced with one new set of 'simplified' rules applying to all pension plans.
A-Day, as the launch date is called, will simplify pension savings for most people. However, higher earners and those with significant pension benefits already accumulated, such as many GPs, will need to consider how the changes might affect their long-term plans.
From A-Day, the current limits on contributions will be replaced with a new annual allowance on pension savings attracting tax relief. For 2006/7, this limit is set at £215,000 but will rise by £10,000 each year to £255,000 by 2010.
Within this annual limit, you might contribute up to 100 per cent of your earnings to any registered pension scheme.
This means that GPs will no longer have to forgo tax relief on the NHS scheme contributions if they want to make significant personal pension pay- ments. With the recent HM Revenue and Customs (HMRC) ruling that both GPs' employer and employee contributions to the NHS scheme will be regarded as personal contributions, this is even more significant.
But the relaxation of annual contribution limits is being countered by an overall limit, known as the lifetime allowance, on the value of pension savings. For 2006/7, this will be set at £1.5 million, rising annually to £1.8 million in 2010.
This is a large sum of money but GPs should remember that with long service it is possible for NHS benefits to be near, if not in excess of, this.
For instance, a GP retiring with a £50,000 pension will have a value of £1.15 million set against the lifetime allowance.
The penalty for exceeding the lifetime allowance is an effective rate of tax of 55 per cent on the surplus. Monitoring your benefits over time against this limit and getting advice regularly could be crucial.
Fortunately, there are some transitional protection provisions. 'Primary protection' is for those with benefits already valued at over £1.5 million.
'Enhanced protection' can be used by GPs who believe their benefits will exceed the lifetime allowance in the year they draw them. Less happily, with enhanced protection it still seems easy to lose your protection, judging by a range of scenarios in which HMRC would deem it forfeited.
A-Day will also see a range of other pension changes. These include increasing the minimum age for drawing pensions from 50 to 55 in 2010 and relaxing the rules on the purchase of commercial property from connected individuals under self-invested personal pensions (SIPPs). The latter will allow GPs to consider investing their pension funds in their own practices.
There are also new rules on life insurance provided via pension schemes, enabling you to obtain significant life cover with up to 40 per cent tax relief on premiums.
Although these regulations replace the old rules, it is up to each scheme to change its rules to reflect the flexibility.
The maximum you can contribute to the NHS scheme in 2006/7 is capped at £108,600 for those who joined the NHS scheme after June 1989.
With the NHS Pension Scheme, it could be some time before we know how the regulations will affect GPs, but they should ensure they have regular pensions health check-ups.
- Jon Dunckley is a pensions specialist at Medical Sickness (part of Wesleyan Assurance Society) which specialises in advising doctors. Call 0808 100 1884 or visit www.medical-sickness.co.uk/medics
Ask yourself the following questions:
- Are your benefits likely to exceed the £1.5 million lifetime allowance? If so, look into primary protection.
- Is it likely your benefits will exceed the lifetime allowance at retirement? If so, consider enhanced protection.
- Do you have scope for extra pensions savings? Check whether you can use the new, more flexible rules.
- Have you considered the possibility of investing in your own practice through your pension? Talk to a financial adviser about this.
- Find out if you can get life insurance more cheaply through the new rules on pension-related life cover.