This article delves into the intricacies of the pension implications of the new Public Only Consultant Contract 2023 (POCC23), and we explore the current allowable pension limits, the nuances of the new contract, and the potential pitfalls and confusions arising from recent HSE FAQs document as they impact on pension benefits, writes Ronan McGrath
Changing Landscape and Rules – experienced, expert advice is essential
In the ever-evolving landscape of healthcare and finance, hospital doctors, particularly consultants, find themselves at the crossroads of significant pension challenges. Recent legal and regulatory shifts have not only complicated the pension landscape but have also introduced potential tax implications that can impact retirement plans.
Current Allowable Limit – €2 million
Since January 2014 the limit on the capital value of an individual’s total pension savings at the point of retirement, before a super tax kicks in, has been set at €2 million. This is called the Standard Fund Threshold. The Threshold limit had been as high as €5.4m in the past, before being reduced to €2.3 million in 2010 and to €2 million in 2014. While the Minister for Finance has power to increase the Threshold annually, in line with the growth in average earnings, the power has not been used and so the €2m Threshold today is the same as it was back in 2014.
For the purpose of the Threshold limit, defined benefit pensions are converted to a notional capital sum at retirement, at a rate of 20:1 for pension accrued prior to January 2014. It uses age related factors for the balance of your pension. For example, at age 65 a factor of 26:1 is used to convert your pension accrued after January 2014 into a notional capital sum.
If you exceed €2m the Super Tax is 40 per cent
The super tax, called Chargeable Excess Tax (CET), applies to the excess of the capital value of all pension benefits taken over the Threshold limit. Currently the chargeable excess tax rate is 40 per cent. Usually, the most tax efficient way to repay the CET is by opting to reduce your pension for the first 20 years of retirement.
Reduction in your pension of €10,000 per annum
If we take a simplified example, with the capital value of all your pension benefits taken at €2.5 million, then the excess over the Standard Fund Threshold is €500,000. This can lead to you facing a chargeable excess tab bill at retirement of up to €200,000. If this is paid by reduction in pension, it will reduce your pension in retirement, for the first 20 years, by €10,000 pa. The chargeable excess tax system can therefore result in a much lower pension in retirement than you expected.
Higher Pension Limit of €2.3m available for some
In certain situations, individuals may have the flexibility to extend the €2m limit up to €2.3 million, contingent upon their specific circumstances. This is referred to as a Personal Fund Threshold limit (PFT).
Revenue allow Consultants where eligible to apply at retirement for a PFT (or a higher PFT) under a Look Back Arrangement, when your Professional Added Years vest. This can potentially raise your Personal Fund Threshold up to €2.3m with a resulting tax saving of up to €120,000. Refer back to our 2021 article ‘Pension limits – a major cause of concern for hospital doctors’ for further information on this.
We have observed that many consultants are nearing, or are already over, the Threshold. Consequently, their public service pension benefits may be negatively affected if they transition to the new contract.
Three years of service, a necessity
If you are nearing retirement, you should be alert to the fact that you need to complete a full three years of service on the new Contract to fully benefit in terms of your pension benefits from the higher salary on offer under the new Contract.
Uncertainty regarding any benefits already received
In relation to pensionable allowances on moving to the new Contract, there is still some uncertainty regarding the extent to which a Consultant can retain, for pension purposes, the benefit of pensionable allowances received in the last 10 years. In particular a Clinical Director allowance.
Understanding the New Contract’s Pension Implications:
Currently, following recent clarification from the HSE, I believe the pension impact of moving to the new Contract is as follows:
1. Retirement after three years of moving to the new contract:
- If you switch to the new contract, and remain on it for at least three years before retiring, your pension will be based on your salary at the date of retirement. Plus, on the three year average of your pensionable allowances from the new contract alone. Pensionable allowances received under the old contract are not taken into account.
- For instance, if you had a Clinical Director (CD) allowance in the past decade but moved to the new contract and retired after three years, only the allowances from the new contract would be considered. The previous CD allowance wouldn’t count.
2. Retirement within three years of moving to the new contract:
- If you change to the new contract but retire within three years, your pension will be calculated based on an average of the last three years’ salary and allowances. This is between both the old and new contracts, pro rata to the time on each contract.
- This means, if you received a CD allowance in the three years leading up to your retirement, it would partially contribute to your pension calculation.
Potential 50 per cent loss of pension increase if moving to the new contract
Consultants should also be aware that if their private and existing public service benefits combined, prior to moving go the new Contract, are already at the Threshold limit, approximately 50 per cent of any additional pension arising from the new Contract may be lost in chargeable excess tax over the first 20 years. The pension gains from moving to the new Contract may not be as significant as expected.
Each case is unique
Here is a note of caution for consultants who are about three years away from retirement and have recently received high allowances. Switching to the new contract might not necessarily be beneficial for their pension. However, everyone’s situation is unique, so it’s essential to assess your personal circumstances before making a decision. Ensure you have the correct information before making a decision.
Optimum Point of Retirement
Choosing a retirement date which maximises pension benefits and minimises tax liabilities is a delicate balance. While accruing additional years of service can lead to a more substantial pension, you need to be aware that chargeable excess tax could in some cases result in the loss of about 50 per cent of the additional pension accrued.
In the chart below, from a case we reviewed in September, we outline the optimum retirement point to maximise pension benefit and minimise the Super Tax (CET). In this case, the consultant will be at optimum pension in September 2027, with 38.5 years service, at age 61. They reach 40 years service in Sept 2028 however it will result in a slightly lower pension benefit, and reduces further if they work on.
This is a curious case which illustrates the point that each individuals projections can have its own unique variables. This consultant enjoys their work and had planned to work on to age 65. As it stands the current pension limit penalises him to do so. An unusual case and not the norm.
The Super Tax can reduce if you to stay working
In some cases, the Super Tax (CET) on your pension benefits can reduce marginally if you stay working. This is based on the lower revenue factor that is applied to convert your pension into a notional capital sum for the Threshold limit, as you get older.
For those who would like to stay working it may make sense to do so. Without a clear breakdown of your projected benefits and tax liability, retiring due to taxation concerns alone can also be a costly mistake.
The €2m limit can be easily exceeded unexpectedly
While €2 million is a hugely significant sum. The age related factors used to value pension accrued post 1st January 2014 , combined with private pension benefits, can mean that a Consultant on a modest pension (relative to their working salary) can easily find themselves exceeding the Threshold limit. This is at retirement and triggering a significant chargeable excess tax bill. The table below illustrates the point. In the example, we outline the impact for a consultant of moving to the new contract and the pension before CET is applied and after.
As outlined in the table below the consultant in this case has reached 40 years service at age 63 when including their Professional Added Years and can accrue no further service after this point. Once the full three years service are factored in the figures there is a sizeable up lift in pension
Sinn Féin Pre-Budget manifesto – future governments need to rethink
Sinn Féin announced in October their Alternative Budget for 2024, that they will reduce the current €2m Threshold limit to €1.5m. These types of moves would further exacerbate an already difficult position. It could lead to exodus of hospital doctors from the public service once their pension benefits reach the Threshold limit – as has been seen in UK with the NHS.
If future governments want to recruit and retain consultants, they will have to at least turn back on the indexation in line with earnings for the current Pension Threshold limit. Otherwise experienced Consultants may be incentivised to leave public service early before their chargeable excess tax bill starts to build quickly.
Minimise your risk
There are a couple of steps which you can take in order to ensure that you minimise the risk of a significant chargeable excess tax liability on your pension benefits. We have outlined these in our 2021 article referred to earlier in this article. However, the key point is to request a breakdown of your projected pension benefits from your pension department. Then get a suitably qualified, financial advisor to review your figures.
Incorrect submissions have detrimental results
With the sheer volume of requests being submitted to the various HSE/Hospital pension depts across the country, understandably there has been an increase in incorrect projections of pension benefit statements. This has been further compounded for pensions staff by contradictory communications from higher up the command chain in the HSE.
The importance of having a clear understanding
Issues which arise include incorrect salary/allowances, factors to calculate chargeable excess tax, or years of service/Professional Added Years being omitted, are not unusual. These can lead to substantial losses if not checked. The ambiguity surrounding pensionable allowances when transitioning to a new contract are further complicating matters, in our view unnecessarily. Having a clear breakdown of your projected benefits, is the starting point to form the foundation of a well-informed retirement plan.
The first steps for your peace of mind
The first step is to get a statement of your projected benefits. Having accurate information to make an informed decision has taken on a greater importance when you are considering, or planning, your retirement.
Then make sure you are getting the right advice. Not all advisers have the technical knowledge and experience to advise on the most efficient ways to mitigate any tax liability on HSE pension benefits especially if coupled with AVC and other private pension benefits. The wrong advice could be costly!
Ronan McGrath will be speaking at the Royal College of Surgeons “Planning for Retirement” conference being held for hospital doctors on Friday, January 26th, from 1pm in the RCSI.
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: firstname.lastname@example.org or on 086 609 8615.
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