Healthcare pensions: How to get the most out of your savings

The healthcare pensions landscape can be complicated. This is especially true for higher earners subject to the tapering rules.

But while tapered allowance can impact your savings potential, there are still ways to optimise your retirement strategy and top up your pension pot.

Understanding tapered allowance

In April 2016, the Government introduced tapered annual allowance. The measure’s primary aim was to regulate the pension tax relief available to higher earners.

However, the measure had a significant impact on the NHS pension scheme, disproportionately affecting senior NHS doctors, who often take on additional work to cover service pressures.

How pensions and tax benefits work

Traditionally, pension schemes have been a tax-efficient means of saving for retirement. The tapered allowance introduces a scaled system: as incomes rise, the amount of pension tax relief you can claim decreases.

Pension allowance

Previously, the annual allowance threshold was set at £40,000. This meant individuals could contribute up £40,000 to their pension pot each year without facing tax penalties.

However, the threshold increased to £60,000 in April 2023, while the lifetime pensions allowance was scrapped altogether.

As a result, the tapering process changed. Now, if your adjusted income surpasses £260,000, there’s a £1 decrease in your tax-free pension contributions for every additional £2 you earn.

Adjusted income and threshold income

While your adjusted income includes all your pension contributions (including employer contributions), your threshold income is your total income minus specific pension contributions.

Both your threshold income and adjusted income can activate the tapering mechanism. You can find more detailed guidance on how to calculate your reduced annual allowance on the Government website.

A word on the NHS pension scheme

Although the NHS pension scheme offers a streamlined way for healthcare professionals to plan for retirement, it might not automatically recognise if someone falls under tapering rules.

If you want to understand more about how your NHS pension is affected, you should speak to a healthcare accountant.

Making the most of your pension

Regardless of whether tapered allowance affects you, there are a few actions you can take to make the most of your healthcare pension:

The carry-forward mechanism

The ‘carry forward’ rule allows individuals to ‘carry over’ any unused annual allowance from the past three tax years. For example, if you contributed £35,000 to your pension last year (with an allowance of £40,000), you may be ablet to carry the remaining £5,000 over to the current year.

Benefits of salary sacrifice

Salary sacrifice involves an employee reducing their salary in exchange for non-cash benefits, such as increased pension contributions. In the context of the tapered allowance, this can be useful.

Lowering your salary might reduce both your adjusted and threshold incomes, potentially preserving a larger portion of your annual allowance. Additionally, contributions made through salary sacrifice are taken before tax is deducted, leading to further tax benefits.

However, we’d recommend consulting an expert before making any big decisions about your pension. An accountant can advise you on the best steps to take to protect your financial future.

Getting your pension strategy right.

Pensions, by their very nature, are a long game. They are about putting aside a percentage of your income today to ensure a comfortable retirement. Regularly reviewing your pension plan is essential, especially if legislation changes.

Even personal events such as marriage, divorce, illness and career changes could call for a review of your strategy. For instance, a higher salary could push you into a different tax bracket and affect your net pension contributions.

Beyond external factors, your personal financial goals might evolve. Early retirement, purchasing a home, or even funding a child’s education can influence how you view and handle your pension. That’s why it’s always best to review your financial affairs with a professional.

Want to know how to get the most out of your healthcare pension? Get in touch to find out how we can help.