There is a large cohort of GPs who have been working in general practice for over 30 years.
Many sensibly maximized their individual allowable pension allowances over this period through private pensions or Additional Voluntary Contribution payments on top of their GMS Pension payments. The increased number of GMS allowances, now pensionable, has also led to a significant increase in funding to their GMS pension, writes Ronan McGrath
Ronan McGrath, Oakwood Financial Advisors
The ramifications
With higher GMS earnings, and many GPs working on past 65 (maximum retirement age currently is to 72 on the GMS) has led to many GPs now exceeding the current pension limit, thus having to deal with a tax liability. In some cases, to complicate matters, there are GPs with additional legacy pension benefits from the HSE for their roles as GP trainers or with Local District Hospitals.
A complicated mix of pension benefits!
No ability to write off tax with 20-year option
Unlike their Hospital Consultant colleagues, GPs do not have the option to apply for an enhanced pension limit or write off their tax liability over a 20-year time period. The Chargeable Excess Tax liability is payable at the point of retirement, if they exceed the current €2 million Standard Fund Threshold limit.
Chargeable Excess Tax (CET)
A chargeable excess tax of 40 per cent applies to pension assets over the €2 million threshold. At retirement this portion of the assets may be taxed again at higher income tax, USC and potentially PRSI when drawn as income of up to 52 per cent. This leads to a combined effective rate of up to 71 per cent on the excess amount (i.e. 100 per cent – (40 per cent * 52 per cent)). It is not tax efficient to continue making pension contributions once assets have reached the threshold (or projected to reach the threshold).
Here’s how
You can fund up to €2,150,000 and avoid CET by offsetting the tax on your lump sum against the CET. This assumes you take the maximum lump sum of €500,000 (allowable under the 25 per cent lump sum route). Restrictions may apply on the lump sum with the GMS scheme, if you go the annuity route.
Lump-sum offset
The first €200,000 of your lump sum is tax-free. The remaining €300,000 is taxed at 20 per cent or €60,000. This tax paid on the lump sum can be offset against the CET bill reducing it to nil. Effectively allowing you to fund up to €2,150,000 without paying CET. If you reach the pension limit of €2 million, this is an added incentive to keep funding to €2.15 million.
It may be advisable to cease future AVC pension contributions
Pension contributions are one of the most tax efficient means of saving. However, if you are on course to exceed the pension limit ceasing any future AVC payments is advisable.
Investment strategy review
Once your pension assets are valued above the SFT, you need to way up the risk v reward. You are taking on risk where any growth is taxed at a minimum of 52 per cent and up to 71 per cent. There continues to be full exposure to a possible loss through a market correction. The level of risk will be dependent on several factors including asset allocation and time horizon.
How to reduce your potential tax bill
The good news is that there is scope to reduce your tax liability if you exceed the SFT:
– Any pension lump sum, up to €200,000, is paid out tax-free. Any balance, up to €500,000, is taxed at 20 per cent can be offset against the tax due on exceeding the limit.
– Retiring your benefits on a phased basis drawing your Private Pension initially in order to crystallise their value now so that any further growth will not impact on your PFT limit.
– A plus for individuals with private pension benefits is that you don’t have to retire in order to draw down your private pension benefits.
– Splitting Private Pension pots into multiple policies can also allow for a phased or staggered drawdown of pension benefits.
– Take early retirement to keep under the €2 million limit – but be aware of losing ancillary benefits as a result.
Steps to take to minimise your risk
There are a couple of key steps to take in order to ensure that you minimise the risk of a significant Chargeable Excess Tax liability when in an overfunded position.
a) Request current values and projected benefits from your pension providers.
b) Gather together the information (or request your financial advisor to do so).
c) Ask your advisor if they have knowledge of the GMS scheme and how it works. An advisor with the necessary knowledge of the GMS scheme and financial planning experience in this area is key.
d) They can then work out your projected values. Putting the correct financial plan in place is critical.
Allocating GMS Payments
In a partnership situation there may be scope to transfer GMS pension payments between partners while holding on to your capitation fees (a route often used with younger partners joining the practice).
This will depend on each partnership agreement and ensuring you stay within revenue rules on pension payments. Pension partnership splits also have a direct and proportional impact on the death in service and ill-health benefits available from the GMS. If you reduce your GMS payments to nil, you have no death in service or ill health benefits under the scheme.
Deferring drawdown of private pensions
Another option to consider when splitting pension benefits is the possibility of delaying drawdown until a maximum age of 75. However for unmatured benefits at age 75 there is an automatic crystallisation event with Chargeable Excess Tax paid. In certain cases, such as significant ill health, delaying drawdown can make sense as benefits on death are not liable to CET. The full value of the PRSA/Pension may pay tax free to the estate of the policyowner.
Your peace of mind is assured if you have proper advice
Each individuals circumstances will be different at retirement. Getting the right advice is imperative. Many advisors and banks will be happy to give you “free advice” at a claim of no cost, but someone pays. Just because it’s free doesn’t make it the good or the right advice. Very few financial advisors have the technical knowledge to advise on GMS pension benefits and the most efficient ways to mitigate any tax liability. Which options to consider needs careful review before making a decision. Getting expert advice on your retirement planning is imperative.
In next month’s IMT we will outline more specific details around your retirement planning options. 
Information
Oakwood Financial Advisors are specialist financial advisors to the medical profession, with a unique understanding of both the GMS Pension Scheme and also the Health Service Executive pension benefits.
For more information please contact Ronan at: ronan@oakwoodfinancial.ie or on 086 609 8615.
Oakwood Financial Advisors is regulated by the Central Bank of Ireland and only recommends regulated investment products.
Visit: https://www.oakwoodfinancial.ie/publications/
This has been an advertorial fature on behalf of Oakwood Financial Advusors.