The government announced this week that it will be consulting over a new set of proposals which will give high earning doctors, who have been affected by the annual allowance tax charge, greater flexibility over the amount they put into their pensions.
Under the plans the same percentage of income a GP chooses to contribute to their pension will be applied to the accrual rate, in increments of 10%.
The new proposal allows doctors to set the exact level of pension accrual at the start of the year. Choosing to have 30% of your pensionable income actually pensioned, will result in having the accrual rate reduced to 30%.
For example, a GP with pensionable earnings of £120,000 who is in the 1995 Pension Scheme would usually contribute 28.88% for employee’s and employer’s superannuation ie £34,656 (subject to tax relief, depending on the effect of the taper), in return for an annual pension of £1,680 and a lump sum of £5,040 when they retire.
If that same GP chose to pension just 30% of their pensionable income, the cost would reduce to £8,345 (subject to tax relief depending on the effect of the taper) in return for an annual pension of £504 and a lump sum of £1,512.
The announcement states that employers would have the option to recycle the unused employer's contributions back into a doctor’s salary.
While the move to increase flexibility is to be welcomed as it gives the doctor some choice over the amount of pension contribution, there are some immediate issues that come to mind.
The percentage of pension to be chosen by the doctor has to be made at the beginning of the year – GPs won’t know their profits until after the end of the year, so some guesswork will be needed.
It seems unusual that employers ‘have the option’ to recycle the unused pension contributions back into the doctors salary. Surely if this is to happen it should be consistent for everyone. For GP partners, this money would remain in the practice and therefore be available as increased profit.
However, presumably the recycled money will be subject to income tax in the usual way, so what would have been at some time considered tax deductible pension contributions will now be split into part that is tax deductible and part that is taxable.
The recycling of the income will actually increase the effect of the taper. It will increase the income of the doctor therefore meaning that they are more likely to be exposed to the taper limits that reduce the amount of pension you can accrue in a year before being taxed.
In short the changes will provide GPs with some flexibility but they also have the potential to make pension and tax planning much more complicated for doctors. GPs would be advised to seek expert advice before they make any changes to their pension contributions to assess how this would impact on their current tax situation and their final pension.
- This article was written by Laurence Slavin, a partner with chartered accountants Ramsay Brown LLP who specialise in the finances of Doctors and can be contacted at firstname.lastname@example.org or 020 8370 7710. Ramsay Brown LLP are members of the Association of Independent Speciaslist Medical Accountants (AISMA)
This article has been produced from information available at the time and should not be relied upon for making decision without consultation with a professional adviser.