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NHS Pension Lifetime Allowance Issues – Income versus Lump Sum?


Retirement planning as a whole is often a daunting task. On top of your highly complex and often stressful day job, you have to contend with the ramifications of ‘oversubscribing’ into your pension due to the potential tapering of allowances, thereby potentially creating an additional tax burden annually on the contributions which you have little control over.

However, as you approach the scheme retirement age you may find your focus switching to the tax implications at retirement, including how the lifetime allowance could impact your pension income and also lump sum.

At present, the Lifetime Allowance (LTA) stands at £1,073,100, and following the most recent budget, the Chancellor has frozen this until 2026. The value of any pension drawn more than this will be taxed at either 25%, plus your marginal rate of income tax if drawn from the income, or 55% if taken from a lump sum. However, it may be a mixture of the two.

Example 1:

Looking at an example of this a member in the 1995 Section who has a pension income of £50,000 per annum and a standard lump sum of three times the annual income of £150,000.

The total amount of pension to be tested against the LTA to see if any tax may be due would be calculated as follows:

  • £50,000 X 20 = £1,000,000
  • Plus
  • £150,000 = £1,150,000
  • Therefore £1,150,000 less £1,073,100 = £76,900 excess of the LTA
  • As the lump sum is within 25% of the LTA, this charge will be deducted from the income element of the pension, therefore being taxed as £76,900 X 25% = £19,225.

Based on this scenario, there would be an actuarial reduction of the standard income payable. In addition to this, you would pay income tax upon receipt of the pension with the lump sum being unaffected.

One aspect of financial planning which is often overlooked is the lump sum entitlement in the 1995 scheme. It is commonly considered that drawing the maximum lump sum from your pension will reduce the potential tax implications. Within this scheme, you accrue a standard lump sum of three times your pension income, however, you are also able to exchange further pension income for an increased lump sum. Whilst it is commonly the case that drawing a lump sum may reduce your LTA  burden, due to the mechanics of how the pension value is calculated, you are limited to a lump sum which is taxed at 0% to the value of 25% of the LTA, with the excess then being taxed at 55%.

Example 2:

If we take the example above, upon retiring, rather than taking financial advice, this member has been told by a colleague they should take the highest lump sum possible to reduce their tax burden. In this instance, they elect to draw a lump sum of £325,000 and a reduced income of £40,000 per annum.

The calculation would now be as follows:

  • £40,000 X 20 = £800,000
  • Plus
  • £325,000 = £1,125,000
  • Therefore £1,125,000 - £1,073,100 = £51,900 excess of the LTA
  • Though on face value this excess is lower, given the value of the lump sum is more than 25% of the LTA, part of this charge will be taken from the lump sum.
  • Therefore, £268,275 would be paid tax-free (taxed at 0%), with £56,725 suffering a 55% tax charge (£31,198.75) as this will be drawn as a lump sum. Therefore the total liability would be £83,098.75 (£51,900 + £31,198.75).

Whilst in most scenarios drawing a higher lump sum could be advantageous, the level of the lump sum should be carefully calculated and potentially not just at the ‘maximum levels’. In our opinion, it is therefore vital that advice should be taken on what can be highly complex matters.

To add a further layer of complication to this scenario, whilst the discrimination case against the NHS pension’s transition from the 1995/08 scheme to the 2015 scheme has been upheld, legislation is yet to be released on how this will impact the above. Therefore, there are a lot of unknowns on just how this will impact pension accrual, and therefore the potential for an overfunding, as well as the LTA. Another reason for building a relationship with a trusted adviser to help support your decision-making.

At Armstrong Watson, we are Chartered Independent Financial Advisers. Our quest is to help our clients achieve prosperity, a secure future and peace of mind. If you are approaching or above the Pension Lifetime Allowance we believe it’s important that you receive personalised financial advice tailored to your circumstances to help you reach the outcome that is right for you as an individual. If you would like to discuss how the pension lifetime allowance affects you, please contact Simon Mayoh on 07860 846370 or

For futher information or advice on NHS Pension Lifetime Allowance Issues, please get in touch with Simon Mayoh on 07860 846370 or email

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