Pensions special: Coffee room confusion

Dr Bernhard Heidemann breaks down some of the pension system complexities

There is no doubt that amongst all coffee room conversation topics the taxation of pension contributions is one of the most commonly discussed amongst hospital consultants.

The topic is so complex that even financial professionals struggle with it. Accountants often have a very limited understanding and will exclude any pensions advice. As a result, coffee room talk often leaves Consultants more confused and in some cases has resulted in rash decisions. Trainee doctors too are beginning to wonder about the best way to build their pension.

HCSA is not able to give financial advice and cannot assist with individual queries. We are, though, concerned by the lack of easily digestible information available.
The three big words in pension taxation are lifetime allowance, annual allowance and tapered annual allowance. This article concentrates on the latter two.

The Annual Allowance
The annual allowance (AA) is the amount of pension contributions, called the pension input amount (PIA), on which you are allowed to claim tax relief. This is set at £40,000 per annum.

If the PIA exceeds this amount it then becomes your duty to declare this to HMRC and pay any tax recovery charge associated. However, this is not necessarily a straightforward calculation.

Part of the challenge lies in the way hospital doctors’ PIA is calculated: it is not a simple case of taking your monetary contributions, but relates to the notional “increase” in your pension between the start and end of the tax year. This can cause particular problems for doctors whose pensionable income increases during the year, whether due to a promotion, pay progression or an increase in hours.

At this point “carry forward” can provide some breathing room, but involves some complex calculations. Carry forward means that you are allowed to use any unused annual allowance from the preceding three years to reduce your tax liability in the current year.

The Taper
The next – and perhaps most notorious – level of complexity is the so-called taper. For every £2 of income above £150,000 per annum, your annual allowance will be reduced by £1, from £40,000 down to a floor of £10,000. This floor is hit if your total income is £210,000 or greater. Complicating this further is the way in which your net income is calculated. A common misconception is that only your pensionable income is used in this calculation when in fact all of your taxable income is used, including private earnings, dividends, interest etc.

As long as this is below the threshold income of £110,000, you will not be subject to a tapered annual allowance. But if you exceed £110,000, “adjusted income” will be calculated which consists of your total taxable income plus your PIA. If your adjusted income is above £150,000 then the taper is triggered.

It is this complex maze which is now causing so much trouble for hospital doctors, and impacting on patient care. If you think you are affected by this or are unsure, you should seek assistance from a financial advisor with specialist knowledge in this area.