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Technical View

Technical View: April 2016


In this month’s Technical View we take a look at some of the questions received by our technical team over the past few weeks including questions on funded public sector schemes such as the NHS and Teachers’ Pension Schemes. Hopefully, this information may assist you with some queries you are experiencing with your clients but for large pension schemes, such as public sector schemes, their own websites are aimed at members and are often a good source of information.

Question 1

A client who is a Doctor with gross annual salary of £200,000pa is a member of the NHS pension scheme. For the last 2 years the client has contributed £48,000pa into the NHS pension scheme, exceeding the Annual Allowance of £40,000.
What are the client’s options when considering his current contribution level and any potential tax charge due?

Answer 1

For defined benefit schemes, such as the NHS Pension Scheme, the pension input amount (pension savings) is not the total of the contributions paid. Instead it is calculated as the increase in value of the pension benefits over the pension input periods.
The administrator of the NHS Pension Scheme must issue any member whose pension input amount exceeds the annual allowance with a pensions savings statement.  If the value of the pension's benefit has increased by more than the annual allowance (currently £40,000) there will be an annual allowance charge to pay.
If the charge is more than £2,000, the scheme can be asked to pay it, in return for a reduction in the member’s benefits. The NHS have a factsheet on how this works on their website which confirms HMRC’s guidance (please note, both of these links will take you to external websites).  
With regard to mitigating the annual allowance charge, the Doctor may be able to forgo an increase in pension benefits (which would normally be linked to pensionable salary) in return for some other employer benefit, but this would need to be negotiated and may not be feasible. Again the NHS Pension Scheme website has more information on this. 

Another point to consider for the Doctor is that he may be close to, or over the Lifetime Allowance, unless he already has some protection from the Lifetime Allowance charge.   If his expected pension is £50,000pa or more, and he has no protection from the lifetime allowance, he will be over the Lifetime Allowance of £1million. This is because a factor of 20 is used to value DB benefits crystallising, and £50,000 X 20 = £1m.

Question 2

I have a client who currently holds a commercial property within their SIPP in addition to other assets (total value £900,000). The property is valued at circa £300,000 and there is a mortgage of £150,000 on the property charged to it via the SIPP.
Is the value of the SIPP for lifetime allowance (LTA) purposes the value of the property less any mortgage held against it, i.e. £150,000 rather than the gross value of £300,000?

Answer 2

When there is a mortgaged commercial property within a SIPP, the Lifetime Allowance (LTA) is tested against the net asset value of the pension fund. This is because if part of the property is mortgaged, it is not fully owned by the individual’s pension fund and therefore would not be included as part of the LTA calculation.  If however, the mortgage has been paid off by the time the individual came to crystallise their benefits, it would be included in the value of the pension fund.

Question 3

A client who is a member of the Teachers’ Pension Scheme has received a pension statement which would suggest they are exceeding the annual allowance.
The client’s pensionable earnings are £90,000 and is currently paying 12% and the employer pays 16.5% into this scheme and the client also contributes £6,000pa to an AVC. However, the figures quoted on the documents would suggest she is paying much more than this, could you please explain the increase in this value?

Answer 3

The Teachers’ Pension Scheme (TPS) is a defined benefit scheme and the pension input amount is calculated based on the increase in value of the benefits between the start and end of the pension input period, rather than pension contributions. The increase in value is likely to be due to an increase in her pensionable salary between the start and end of the pension input period, and a further year’s pensionable service being accrued.

The TPS have an excellent website for its members, including an annual allowance calculator. For full details of how the pension input amount has been calculated, your client should contact the TPS administrator.

We hope this edition has provided some clarity on some queries you might be having with some of your clients. For further information on the content of this document please feel free to contact the technical team on technical@sanlam.co.uk where we will try and assist with your query.

Date Issued: 13.4.16

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at April 2016 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.
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