Should I continue to fund pensions if I have Lifetime Allowance problems?

Category: Retirement&Tax

When looking at the Lifetime Allowance things are not as simple as they seem. The case study below looks at some of the things to consider.

Mr Bloggs is a 57-year-old consultant surgeon with the NHS. His wife is 52 years old and works for a pharmaceutical company, although she also worked within the NHS. Both have been thinking about their pension provision and are concerned about the lifetime allowance. 

Mr Bloggs has 35 years’ service in the NHS pension scheme and recently went into their current Career Average version of this. His earnings are £120,000.  

Mrs Bloggs has worked with the same employer for the past 18 years. She currently earns £110,000 and is a member of the workplace auto-enrolment pension scheme, into which her employer pays 12% of her salary, and she pays 6%. She also has benefits in the NHS pension scheme for nine years until 2004.

Have they breached the Lifetime Allowance already?

For this exercise, we will assume neither Mr nor Mrs Bloggs has any Lifetime Allowance protection.

In Mr Bloggs’s case, his 35 years of service gives him a current level of benefits of £52,500 pa plus a lump sum of £157,500. To work out the value of these benefits for the purposes of the Lifetime Allowance, we need to multiply the income by 20 and add the lump sum. This gives us a figure of £1,207,500 against a lifetime allowance of £1,073,100.

Mrs Bloggs’s position is less clear-cut and dependent on the value of her deferred NHS Pension and her workplace pension. We will assume here that she is also likely to exceed the lifetime allowance.

What are the considerations now?

Value of the pension accumulating
  • In Mr Bloggs’ case, the career average version of the NHS pension scheme means his benefits will increase by 1/54th of his pensionable earnings each year.
  • From October 2022, his contribution rate will be 13.5% of pensionable income. 
  • In Mrs Bloggs’ case, she pays 6% to gain an employer contribution of 12%.
  • Both will receive tax relief on their contributions at their highest marginal tax rate, which will effectively be 60% as the contributions help restore some of their personal allowances. 
  • However, Mr Bloggs is likely to close to or exceed the annual allowance, which also needs to be monitored and considered.
  • In both cases, the benefits they accrue are likely still to be regarded as value for money, given that they will still get value from their employer’s contribution even if they lose the maximum 55% lifetime allowance tax charge (for a lump sum) on the excess.
Other benefits
  • In Mr Bloggs’s case, there are significant benefits such as ill-health early retirement and death benefits that he enjoys as a member of the NHS scheme.
  • In Mrs Bloggs’s case, there is a separate death in service lump sum scheme provided but no other benefits.
  • The benefits available on the death in service scheme could be assessable for the Lifetime Allowance if claimed, so an alternative arrangement may need to be set up.
  • In both cases, note that any lump-sum death benefits are likely to be paid free of inheritance tax, so there is likely to be an advantage over other methods of saving in this regard.
Risk and certainty of benefits
  • In Mr Bloggs’s case, his benefits are essentially risk-free in a final salary scheme.
  • In Mrs Bloggs’s case, her benefits are exposed to a variety of risks.
Other alternatives
  • In Mr Bloggs’s case, the NHS does not offer alternative funding to pensions.
  • In Mrs Bloggs’s case, she could ask her employer if she could be provided with an equivalent monetary package through an increased salary. 
  • She would then need to compare the two options.
Flexibility of benefits
  • In Mr Bloggs’ case, the NHS Pension scheme benefits, whilst being generous and largely guaranteed, are also fixed in nature and cannot be drawn upon flexibly.
  • In Mrs Bloggs’ case, she has the full range of flexible pension options available to her and the back-up of a largely guaranteed lump sum and pension through her NHS pension benefit.

As you can hopefully see, when someone has lifetime allowance issues, stopping funding pensions may not be the right answer. Being able to explore and analyse the different options is something financial planners can help with

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