NHS pension and lifetime allowance

[Chrysalis]

I am a current member of the NHS pension scheme (1995 and 2015 sections). I also have a SIPP. Together the current value is about £750k and I am 50. I intend to take the NHS 1995 pension when I turn 60 and the 2015 pension at the earliest point I can take it without incurring penalties. The SIPP probably won't be drawn down, perhaps ever.

I think it is quite likely (or certainly possible) that I will exceed the 1m LTA limit across all pensions by the time I am 60 but I think it extremely unlikely/impossible that my NHS pension on its own will reach the LTA. I'm likely to stop NHS employment within the next 5 years. I definitely want to stay in the NHS pension for as long as I can.

Can anyone explain how and when I would be liable to pay the excess tax if I do breach the limit? I want to avoid paying the charge on the NHS pension if at all possible, but I'm fairly relaxed about paying it from the SIPP if necessary.
Would it be advisable to stop paying into the SIPP? I do it because it increases the proportion of my assets that are tax sheltered and also because it preserves my child benefit payments. I don't mind paying the excess charge from the SIPP eventually, given that it's likely that I won't draw it down in my lifetime but will pass it on to heirs, and I don't think (?) it compares badly to paying IHT on it.

If anyone can explain the nuts and bolts of how the calculations and payments work, that would be extremely helpful.

[coleyfish]

Jabd2001

I think I can help you with this

You will not be able to accrue any further 2015 pension after you draw your 1995 scheme benefits, although this will not stop you deferring the 2015 pension until normal retirement age (state pension age).

So your first LTA crystallisation will be at age 60 when you draw the 1995 benefits. You will draw benefits of x% of the LTA. If this is less than 100% of the LTA there is no LTA charge and you will have a balance to carry forward to the next crystallisation event.

This is likely to be at state pension age when you draw your 2015 scheme benefits.
Once again if the new total % is less than 100% of your LTA amount then you will have a balance to carry forward.

If at any point you do draw excess LTA benefits then you will pay a charge equal to 55% of any amount taken as cash and 25% on any amount of excess income. The NHS scheme is structured in a way that makes it very difficult to withdraw the entire excess fund as cash so you will have a deduction levied against your income after applying the excess charge. Ultimately, if you draw the SIPP benefits any excess fund could be taken as cash subject to the 55% charge.

If you don't draw benefits then there will be a benefit crystallisation event at age 75 or death if earlier.

You would be better off paying into the NHS scheme whilst you are able. You should then work out what your likely LTA value will be when you envisage leaving the NHS, to see whether contributing to the SIPP is simply going to increase your excess fund. If this is so then the value of contributing will be much diminished and you should consider stopping contributions.

If you are going to remain in the NHS and have current LTA value of around £750K then I suspect you are likely to exceed the LTA in around 5 years so contributing even now to the SIPP is likely to be marginal if you plan to stay with the NHS for that period of time.

Don't forget that even though your future accruals in the NHS are 2015 scheme, but the benefits in the 1995 scheme will also be revalued to your increasing salary/ pensionable earnings.

One of the issues with the 2015 scheme is that the combination of later pension age and accelerated accrual leads to a bigger problem in relation to the LTA, unless you build in early retirement from the 2015 scheme on pretty penal terms i.e. big actuarial deduction for taking benefits before pension age. Let me know of you have any supplementary questions.

Coleyfish

[Chrysalis]

Thanks for the detailed reply coleyfish [rec]
That tallies with what I thought I'd understood. Basically as long as I don't exceed LTA with the NHS pension it will 'just' be the 55% surcharge to pay.
I'm not working many hours now so I don't think I'll get too close to LTA with future NHS contributions. Once I'm deferred it only goes up by CPI so should be ok if the LTA does rise as promised.
DIfficult to know whether to keep adding to SIPP - hard to call investment returns 10 years hence!