Key change in lifetime allowance spurs early retirement for NHS workers


Two quite distinct developments in pension law will have a major impact on top earners in the NHS, including doctors, surgeons and consultants.

The first is a change in the 2021 finance bill affecting the Lifetime allowance, which sets a limit on how much you can save in your pension, with tax relief, over your lifetime.

The lifetime allowance is currently £ 1.0731 million. Normally, this would be linked to the inflation rate of the Consumer Price Index (CPI) so that it increases every year.

UK government ministers have now removed that link, freezing the allocation for the next five fiscal years until 2026.

This development particularly affects people near the end of their working life, with retirement on a not-so-distant horizon, whose retirement savings risk exceeding the ceiling in recent years.

The problem is that these excess savings lead to heavy tax penalties. You will pay 25% tax on the excess you collect as pension, or 55% if you take it as lump sum. This is designed to recoup the tax relief you receive on those savings.

“Punitive tax bills”

At Anderson Anderson & Brown Wealth (AAB Wealth), we are already seeing that many healthcare professionals and other professionals are cutting back their hours, or even retiring earlier than they would like, in order to avoid such punitive tax bills. .

We have also followed a second separate issue that blurs the lines around the future of retirement savings for surgeons, doctors, consultants and, indeed, all NHS and public sector workers.

Complex pension legislation has imposed new regulations for people in public sector plans, redrawing the thresholds between different age groups and the way their retirement savings are treated.

In the case of the NHS pension, it is divided into three sections and in each the savings benefits are calculated differently.

In the past, this meant that two people born two years apart could receive very different treatment, depending on their age.

“Play the long game and keep your cool to earn rewards”

The Circuit Court, taking two public sector pension schemes (judges and firefighters) as test cases, said the rules amount to age discrimination and need to be reformed.

Named after the Judges’ Pension Plan, it is now commonly referred to as the McCloud decision.

The government accepted the judgment, which would have affected only the two regimes mentioned above, but decided to apply the spirit of the judgment more widely and said all public sector plans would be reformed.

That’s good news, of course, but it leaves the NHS and other public sector workers ‘saving blind’ as the health service revises its plan to build a new, fairer system.

NHS workers, meanwhile, are confused as they don’t know what the detailed outcome of this review will be.

All they’ve been told is that the NHS is aiming for October 2023 as the date they will get clarification on the benefits.

André Dîne is a Director and Certified Financial Planner at AAB Wealth.


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