Many dentists in Scotland are unaware when their pension contributions breach annual and lifetime allowance limits, resulting in tax charges. We examine the importance of proactively requesting pension statements and being aware of the charges.
The NHS pension scheme is a fantastic way for all dentists to save for retirement, with the Scottish Government currently contributing20.9% of earnings to pension pots. Most people will have no problems, but many are unaware that longer-serving or higher-paid dentists who build larger amounts of NHS pension can encounter tax charges.
Inflation causing tax issues
"Many are unaware that longer-serving or higher-paid dentists who build larger amounts of NHS pension can encounter tax charges."
Payments added to your pension pot are tax-free, but the Government stated that this tax relief can only go so far. Every tax year, pensions are examined, and if your pot grows more than the annual allowance cap, you will pay tax on the difference. When you come to retire, if your pension is worth more than the lifetime allowance cap, tax charges will be applied to that too. Members may find our advice
on pensions and tax useful.
A huge benefit of the NHS pension is growth in line with inflation. Typically, we would see this at levels of 2-3% but with inflation currently at around 10%, we are expecting to see a huge impact on annual allowance calculations for the current tax year, causing more people to breach the annual allowance limit, resulting in tax charges.
You have two options to pay the tax charges: First, you can pay them directly from your own pocket, which may be tricky if your pension attracts very high charges. Alternatively, you can ask your pension scheme to pay them for you in the form of a loan which will need to be repaid, with interest, when you retire and take your benefits.
Requesting your statements
The annual growth section of your pension savings statement will help you to determine any annual allowance breaches. Statements must be requested, as SPPA (Scottish Public Pensions Authority) do not currently send them out automatically. This means that if you do not proactively request them, you will have no notification of any tax payments that are due.
You will only receive an annual benefit statement if you are actively paying into the scheme as of 31 March in any given year. If not, your request for a benefit statement will be refused as SPPA have declared that you must be an active, contributing member to receive one. This is leaving many with pensions that are breaching tax limits due to growth through inflation, with no way of knowing this is happening.
"SPPA is supposed to exist to support its members."
To make matters worse, current requests for statements are going unanswered, with SPPA sending out automated replies stating that estimates are not being supplied at this time. The authority should be providing statements to everyone, both contributing and non-contributing. The fact that the pension regulator does not place a legal obligation on SPPA to do this is simply not a good enough reason, when SPPA is supposed to exist to support its members.
McCloud Sargeant Case
The McCloud Sargeant case also changed the landscape of pensions. The 1995, 2008 and reformed 2015 NHS pension schemes have different accrual rates and pension ages. Some were given protection against the 2015 reforms due to their age and others were not, leaving clear grounds for an age discrimination case.
The win resulted in the need for a remedy period, meaning that all the benefits paid since 2015 will need to be put back into 1995 scheme. SPPA have said that this will be calculated at retirement, rather than immediately, when you will receive an estimate of all your benefits under the two schemes and then choose which one to use.
This calculation will not be ready until October 2023, at the earliest, so if you retire before that date they will need to go back and recalculate everything retrospectively. This makes it incredibly difficult to know whether you want to retire with so much vital information about what your options will be, missing.
"Pensions causing earlier retirement is a significant contributor to the declining workforce."
Pensions causing earlier retirement is a significant contributor to the declining workforce.
The NHS pension scheme is designed to pay out at a specific age, if you choose to retire earlier, the amount paid out is adjusted down to account for the extra years you will be receiving your pension for.
Clinicians who retire earlier are less likely to breach the lifetime allowance and accrue any additional tax bills. This system and the current pressure we see reported daily in the NHS around contract reform and conditions, have resulted in more dentists taking the decision to retire early.
Often, the individuals retiring early are higher earners or long-serving, with valuable experience in the field. This means a lot of younger dentists starting out in their careers will miss out on gaining knowledge from more experienced colleagues.
Looking aheadWe have told SPPA that benefit statements must be provided to anyone who requests them, as dentists cannot be expected to know if they want to retire early, with no estimate of what the benefit or potential cost will be. We need timely and accurate information to be available and SPPA appear to have lost sight of that.
We are working on ways to solve the problem and have argued there should be an option to pay in flexibly; for example, paying half of the normal contributions and building up half of the full amount of pension, meaning you are less likely to breach caps.
SPPA have reassured us that estimates will now be provided for anyone of retirement age. We will be working together to improve the online calculator as demand for the remedy calculations increases. Blaming a software platform is simply not good enough. We will keep you updated as we continue pursuing these issues on your behalf.
Chair, Scottish Dental Practice Committee
Head of Pensions