I’m a doctor with a large pension

[

In our weekly series, readers can email in with any question about retirement and pension saving to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he doesn’t know about pensions. If you have a question for him, email us at [email protected].

Question: I’ve spent roughly half my career as a doctor in the NHS and half my career in the private sector. I built up pensions with both, one defined benefit and one defined contribution. Obviously it’s hard to work out the exact value but combined they are worth over £1.5m I would imagine. As such, I’m worried if Labour win the election that it will reintroduce the lifetime allowance and I’ll be hit with a big tax charge when I retire. Is there anything I can do to protect against this?

Answer: Let’s start by setting out exactly what those two pensions and the “lifetime allowance” are. If you are a member of a defined benefit, or DB, scheme – like the NHS pension scheme – you build up a pension entitlement based on your salary (usually either the average over your career or your final salary) and the number of years you are in the scheme.

For example, someone who is a member of a 1/60ts career average scheme would build up entitlement of 1/60th of their career average salary as an annual, inflation-protected pension from their “normal pension age”. This normal pension age is often, but not always, the same as the state pension age.

Anyone who contributes to a defined contribution, or DC, scheme builds up a pot of money which they can then access flexibly from age 55 (rising to age 57 in 2028). If you are in a workplace pension scheme your employer should contribute too, and your fund will be invested for the long term, either in a “default” fund or a fund you have chosen.

Once you reach age 55 (or 57 from 2028), you can withdraw from your pension pot as you see fit, with a quarter of your fund available tax-free (up to a maximum of £268,275) and the rest taxed in the same way as income.

As such, a DC pension offers more flexibility than a DB pension, but also comes with more risk and responsibility – particular in relation to making sure your withdrawals are sustainable (i.e. you don’t risk draining your pot early).

The lifetime allowance was the limit set on the total pensions you could build over your lifetime. Prior to being abolished in April this year, the lifetime allowance was set at £1,073,100. In its place, the Government introduced limits on lump sums that you can pass on to beneficiaries tax-free after you die.

Labour’s publicly stated position is that it will reinstate the lifetime allowance if it wins the general election. However, it has not provided any detail on how this would be done, the level it would be set at or, crucially, whether it will bring forward any “protections” for those who have increased the value of their pension above any limit – through contributions, investment growth or both – during the intervening period.

Should you do anything now to avoid the lifetime allowance?

Under the old system, breaching the lifetime allowance incurred a tax charge of up to 55 per cent on the excess. Lots of people therefore, understandably, are looking for ways to avoid any potential tax charge if it does return.

The most obvious way to do this would be to “crystallise” your pension ahead of the general election. For a DB scheme, this would just mean taking your income – some (but not all) schemes allow you to do this early, although you will likely receive a cut to your annual income.

For a DC scheme, you wouldn’t necessarily have to take an income, but you would need to choose a retirement income route, such as drawdown (where your fund stays invested and you use it to deliver an income in retirement). However, choosing to crystallise your fund in this way will trigger your one-and-only opportunity to take your 25 per cent tax-free cash entitlement. If you take this, the money withdrawn will form part of your estate for inheritance tax purposes, meaning it could end up being taxed at 40 per cent on death (depending on the value of your other assets).

You will also forgo the opportunity for that tax-free cash to grow in your pension tax-free. In other words: this is anything but a no-brainer decision.

As a general rule, it’s better to deal with the tax rules as you find them and focus on your long-term strategy, rather than second-guessing what may or may not happen under a government that has yet to be elected.

Read original article here

Denial of responsibility! Genx Newz is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – [email protected]. The content will be deleted within 24 hours.

Leave a Comment