Practical steps for GP’s impacted by the pension limit

September 15, 2023

Practical steps for GP’s impacted by the pension limit

This article addresses the challenges faced by General Practitioners (GPs) who have exceeded the current pension limit, leading to significant tax liabilities. It also outlines the practical steps GPs can take to mitigate the impact.

 

The main points from the article are outlined below. Please click on the article link for more detail.

1. Context and Background:

    • Many GPs have been regularly contributing to their pension allowances, either through private pensions or Additional Voluntary Contribution (AVC) payments, and their GMS Pension payments. The increasing number of GMS allowances that are now pensionable has significantly bolstered the funds in their GMS pension.
    • Many GPs are now working past the age of 65, with the maximum retirement age set at 72 on the GMS. Consequently, these factors have caused a surge of GPs to surpass the existing pension limit, facing tax liabilities as a result.

2. Challenges:

    • Unlike hospital consultants, GPs cannot request an enhanced pension limit or spread their tax liability over a 20-year span. If they surpass the €2 million Standard Fund Threshold limit, they must pay the Chargeable Excess Tax (CET) at retirement.
    • A CET of 40% is applied to pension assets exceeding the €2 million threshold. When drawn as income, these assets can be subjected to further taxation, leading to a combined effective rate of up to 71%.

3. Potential Solutions:

    • Offsetting CET: GPs can use the tax on their lump sum (from the allowable 25% lump sum route) against the CET. This approach effectively lets one fund up to €2,150,000 without paying CET.
    • AVC Funding: If the pension limit is likely to be exceeded, stopping further AVC payments is recommended.
    • Investment Strategy Review: If pension assets surpass the SFT, it’s crucial to balance risk vs reward since high taxation rates apply to any growth, while market downturns could lead to potential losses.
    • Tax Bill Reduction Strategies:
      • Utilize the tax-free lump sum of up to €200,000.
      • Retire benefits in phases, drawing from the private pension initially.
      • Split private pension pots for a phased drawdown.
      • Consider early retirement to stay below the €2 million threshold.

4. Minimizing Risks:

    • Review current funding and project pension values.
    • Assemble this information, ideally with the assistance of a trusted financial advisor familiar with the GMS scheme.
    • A suitable financial plan is paramount.

5. Delaying Pension Benefits Drawdown:

    • It’s possible to delay drawing down pension benefits until age 75 (Max age on GMS scheme is 72). However, if benefits remain unmatured at that age, CET is automatically applied. Exceptions can include cases of severe ill health, where benefits on death aren’t subject to CET.

6. The Importance of Expert Advice:

    • Every individual’s retirement situation will vary. While free advice might seem enticing, it’s not always accurate or beneficial. A handful of financial advisors possess the technical know-how to guide on GMS pension benefits. Thus, getting expert advice is essential.

Summary: The landscape of pensions for GPs has grown increasingly complex, especially with many approaching or exceeding the pension limit. This situation brings about substantial tax implications, necessitating careful planning and expert guidance. While there are various strategies to navigate these challenges, from offsetting CET to delaying pension drawdowns, the underpinning message is the importance of informed, expert advice in making these crucial financial decisions.