Pension lifetime allowance

Recent government reductions in the lifetime allowance for pension savings have significant implications for dentists.

The lifetime allowance is the maximum amount you can save towards your pension that is eligible for tax relief. If savings are worth more than the lifetime allowance, a 25 per cent tax charge is payable on the excess.

The lifetime allowance has already been reduced from £1.8 million to £1.5 million in 2012-13. Now it is to be cut again in the 2014-15 tax year, to £1.25 million.

As a result, NHS and other dentists approaching retirement could face significant tax bills based on the value of defined benefit pension schemes, in which the lifetime allowance is calculated on the capital value of benefits.

In these circumstances, the capital value is calculated as:

  • the amount of annual pension multiplied by 20
  • plus the value of the pension lump sum (the annual pension x 3).

So, for example, the capital value of the pension of a long-serving NHS dentist with an annual pension entitlement of £66,500 would be:

£66,500 x 20 = £1,330,000
£66,500 x 3 = £199,500

This gives a figure of £1,529,500, which exceeds the lifetime allowance by £279,500. Taxed at 25 per cent, this would result in a tax bill of £69,875.

At Milsted Langdon Financial Services, we can advise on your options for maximising the tax efficiency of your pension savings, exploring issues including whether you should consider early retirement and whether you should continue paying into NHS or personal pensions.

We can also advise on applying for protection from the lifetime allowance tax charge and paying pension savings-related tax bills.

For more information, please contact us.