Pension tax system particularly unsatisfactory for NHS staff
Author: Louise Prime
Pension tax relief limits bite in particularly unsatisfactory ways on senior NHS staff and are likely to bite much more in 2019/20 than in previous years, according to a new report out today. Royal London warned that this issue is undermining NHS waiting time initiatives – and called for an end to the current “bewildering system of pension tax relief”.
There have been growing reports of senior NHS staff cutting their hours or even retiring because of pension tax issues, and today pensions and insurance company Royal London published a new policy paper explaining the issue and reviewing the various solutions on offer. In Finding the right medicine – how to fix the problems between doctors and their pension scheme it explained that the NHS Pension Scheme has undergone major reform in recent years and staff can easily have rights under one of the older (1995 or 2008) final salary schemes as well as under the 2015 scheme – and given that it is possible in any given year to accrue new rights in more than one section, it can be especially difficult for NHS staff to work out how much of their annual allowance they have used up.
The authors added that another gap in the information available to NHS staff is future projections of their benefits under the 2015 scheme. They argued that although the NHS believes it would be speculative to estimate today’s NHS workers’ future entitlements under the Career Average Revalued Earnings scheme, because future earnings levels are not known, without such information it can be very hard for people to undertake sensible pension planning. They urged: “The NHS Pension Scheme should start to present this information as soon as possible. This would also help members to see the true value of their pensions and might reduce opt-out rates.”
The report concluded that:
- This issue is likely to bite much more in 2019/20 than in previous years because the ability to ‘carry forward’ unused annual allowances from up to three previous years will now only go back to 2016/17 – the first year when the tapered annual allowance was in force; previously, doctors could ‘carry forward’ from 2015/16 when no reduction applied.
- One option – favoured by the Chancellor in his recent evidence to the Treasury Committee – is to make changes within the NHS Pension Scheme and/or NHS pay arrangements. But these would largely be ‘sticking plaster’ solutions for a more fundamental problem.
- The best solution would be to remove a complex and unpredictable feature of the tax system – the tapered annual allowance – even if this required a reduction in the overall annual allowance.
Royal London director of policy Steve Webb said: “It is utterly absurd that doctors are having to consider their pension tax position before deciding whether or not to take on an additional shift or cover for an absent colleague. The NHS is structured around senior clinicians taking on additional roles and responsibilities and this whole culture is being undermined by a bewildering system of pension tax relief.
“Rather than tinkering with the NHS pension scheme, the Treasury should abolish the ludicrous and capricious system of tapering annual allowances for tax relief. Patient care must not continue to suffer on the altar of Treasury intransigence”.
The British Medical Association said the NHS pension scheme is an important part of doctors’ reward package, including many who started working in the NHS more than 20 years ago. BMA Pension committee chair Dr Paul Youngs said this morning: “As this report highlights, the government’s changes are delivering an unfair and unacceptable shock to a large number of doctors especially as some are facing unexpected bills of tens of thousands of pounds.
“Unfortunately, due to the perverse application of annual allowance and tapering annual allowance, doctors would receive higher pensions and remove or substantially reduce annual allowance tax charges by working less than full-time.
“All doctors want a simple, transparent and fair system that allows doctors to get on with what they want to do, treat patients, without the worry that doing extra work will actually make them financially worse off. Urgent action is required to prevent a potentially catastrophic impact on large parts of the NHS.”