While some people are at risk of not saving enough for their retirement, the LTA, which is currently at £1.03 million, has meant that others are penalised for saving too much.
Since its creation in 2006, the lifetime allowance (LTA) has fallen victim to the tinkering of successive governments and just this week, secretary of state for health and social care Matt Hancock called on the chancellor to amend the allowance for GPs.
Hancock claimed that the tax penalties on pensions were the ‘biggest concern’ raised by doctors he had spoken to.
Speaking to New Model Adviser®, Wesleyan financial consultant Jonathan Halberda said: ‘Issues surrounding the LTA are certainly becoming more apparent as doctors are getting older and accruing more… For those in the 1995 and 2008 NHS schemes in particular this is becoming an issue.’
Dodd & Co IFA Phil Jackson noted that the LTA tax charges had considerably impacted the choices made by doctors saving into the NHS schemes. He said: ‘From my experiences nearly all doctors in the last two and a half years have decided to take early retirement so as to reduce their exposure to an LTA charge.
‘The conversations I have had usually start with the Doctor not wanting to be hit with a tax charge, in most circumstances they would still be working if LTA tax wasn’t an issue.’
In contrast, Halberda and Pilot Financial director Ian Thomas argued that while a number of clients look to opt-out when faced with the LTA, they tend to encourage the majority to endure the tax and remain in the scheme.
Thomas said clients in senior education roles were faced with a similar problem.
Thomas explained that like GPs, ‘the highest paid head teachers in the sector have got some sizeable tax charges’ on their pensions too, but said it is ‘important not to sensationalise the issue either’.
He said the LTA for these pension savers is like ‘driving a Porsche with the handbrake up. It’s better to stay in and have a pension that is building slowly.’
Halberda added: ‘While we do not give opt-in/opt out advice, we give an indication what would happen if xyz stayed the same, stating the potential tax costs that would be incurred and where their contributions sit alongside this. This helps clients to quantify the facts and then make a decision.’
Aegon pensions director Steven Cameron agreed there should be a wider change on the LTA as differing treatment between professions would further complicate an already complex pension tax system.
Cameron said: ‘But it’s not just GPs who are affected. These discussions really do need to look more broadly at the impact pensions limits are having on a range of professions. Changing the pension tax relief limits just for GPs would further complicate an already complex tax system and create an unlevel playing field for pension savers in other professions.
‘A pension pot at the lifetime allowance of £1.055 million from next tax year may sound like a lot, but it won’t buy a fat cat pension. We’d urge the government to reverse previous cuts in the lifetime allowance, which stood at £1.8 million in 2012 or ideally scrap it altogether. We should be encouraging people to save more for longer lifespans in retirement, not forcing them into early retirement to escape a tax bill.’
In addition to the LTA, advisers also noted that the annual allowance is also becoming increasingly problematic for high earning clients.
If a person exceeds the annual allowance and is due a tax charge, they can ask the pension scheme to pay on their behalf, known as scheme pays.
Jackson said: ‘I am also seeing a large number of doctor clients trying to reduce their AA figures and with 'scheme pays' coming into effect for the full amount of tax charge, most are keen on going down this route without looking at the wider picture.’