No Protection, Fixed Protection 2014 or Individual Protection 2014. Which is best for you?
This issue is the single biggest concern that is raised at review meetings by all our NHS Consultants, GP’s and Dentists and as a result we have created an analytical process that considers the following to help clients make the right decision.
In the first instance, identify whether or not you have applied for and managed to retain Enhanced Protection.
1. If you have lost it, you could take no action and remain a full member of the scheme paying full contributions and receiving full benefits, but you will probably suffer a significant tax penalty on retirement for exceeding the lifetime allowance (£1.25m in 2014) resulting in a reduced pension.
2. You could opt for Fixed Protection 2014 and exit the scheme, securing a lifetime allowance of £1.5m and your benefits earned to date, but you would accrue no further benefits and lose valuable family protection benefits. This could result in a higher or lower pension compared with option 1 depending on your age, the years left to retirement, your pensionable salary, and the current notional value of your pension pot at the time of leaving.
3. You could opt for Individual Protection 2014 fixing your lifetime allowance at the value of your pension benefits on 1st of April 2014 and remain a full member of the scheme continuing to accrue pension and retaining family protection benefits. This again may produce a retirement pension that is greater or smaller than options 1 or 2 and will again depend on the years left to retirement, your pensionable salary and the current notional value of your pension pot at 1st April 2014.
• All the above calculations will also depend on whether or not you currently hold merit awards or if you are likely to be awarded them in the future and whether these are likely to be retained for a full 12 months within the three years leading up to retirement. Also, whether or not your current awards can remain in place or whether they will be switched to the new upcoming rules pertaining to merit awards and if so whether pay protection can be applied for or not.
• In addition to this you should consider the possible monthly savings available in terms of not having to pay pension contributions by coming out of the scheme under Fixed Protection. If these savings are likely to produce returns that are comparable to the heavily taxed benefits lost through non membership then this needs to be looked at carefully.
• You will also need to consider the pension annual allowance and the likelihood of breaching this giving rise to an immediate tax penalty and thus a further tax take not only on the ultimate benefits but also on the contributions.
However, the MOST IMPORTANT FACTOR in the entire decision making process is your personal circumstances. There is a lot of advice being given at present which is concentrating purely on the tax issue of trying to avoid the penalties of exceeding the lifetime allowance and what you will get back at age 60 or 65. In our opinion, as lifestyle Financial Planners, this is a deeply flawed approach as everyone’s circumstances are different and what may suit one may not suit another.
For example, one client may be better off exiting the scheme and applying for Fixed Protection because they have already accrued sufficient benefits to give them a satisfactory standard of living in retirement and the £800 per month they save in pension contributions will help hugely in the funding of their children’s University fees. While another client may have already planned for University fees but due to a broken career path has inadequate retirement provision.
It is impossible therefore to give generic advice on the best course of action to be taken as it differs hugely from person to person.
What is best for me?
Manse Capital has a huge amount of experience and expertise in dealing with these particular issues and other queries regarding the NHSPS. As such, we have developed a process that will allow members of the NHSPS to analyse each of their options in detail, through a series of bespoke spreadsheets, and relate the outcomes of this analysis to their personal circumstances. This then usually produces a conclusive course of action that they should take in order for them to maximise all the benefits available under the pension scheme for their given situation.
If you think this would be a useful exercise and would help with your longer term financial planning please give us call and we would be happy to have an initial telephone discussion without charge or obligation to see if we can help you.