NHS pension proposals suggest ‘complete lack of understanding’ from the Government – Tilney comments

The Government have announced proposals to overhaul the pension rules that have caused doctors, hospital consultants and other senior NHS professionals reduce their hours to avoid being hit with hefty tax bills. This has been a factor leading to increased waiting times for routine operations.

Commenting on the news, Gary Smith, Chartered Financial Planner at Tilney, who specialise in providing financial advice to senior medical professionals, says:

“I welcome the news that the Government has not only acknowledged that pension tax issues are creating a national crisis in the NHS but that they are also looking to address these issues through pension reforms and seeking opinions from stakeholders during the new consultation period. Unfortunately, the measures suggested in the consultation paper are unlikely to provide clarity for those currently affected and also suggest a complete lack of understanding of what the issues actually are and the potential tax implications of the proposals.

“Flexibility of contributions – One of the proposals is to allow NHS consultants to alter their contributions into the NHS pension scheme to reduce or avoid potential tax charges for exceeding their annual pension contribution allowance. However, whilst this flexibility would work for members of defined contribution pension schemes, it will not be effective for defined benefit schemes, such as the NHS pension scheme, as it is not the amount contributed into the scheme that is tested against the Annual Allowance, rather the deemed increase in their pension benefits.

“If we take the example of an NHS Consultant earning £120,000, they will contribute £17,400 (14.5%) and the NHS will make an employers’ contribution of £24,000 (20%) into the pension scheme each tax-year. Although these contributions total £41,400, these are irrelevant for Annual Allowance assessment purposes, as it is the increase in the value of their pension benefits that is tested and this would be circa £36,000 for a member of the 2015 version of the scheme (estimate based upon pensionable income of £120,000). Offering the flexibility to reduce pension contributions will only create confusion and require NHS members to seek advice from their accountants and financial advisers to try to guide them through this.

“Opting out – It is also suggested that those affected could simply opt of the scheme this year to avoid Annual Allowance tax charges. However, by doing this, the member would lose out building up additional pension benefits, and this could have an impact upon their ability to retire, let alone preventing people from retiring early to avoid these tax charges. This is unlikely to appease an already disgruntled workforce, who have already seen the benefits offered by the scheme diluted through changes implemented in 2015. If the member does opt out, then they will also incur increased income tax charges, as they would not have to make contributions for this tax-year and this would result in them missing out on valuable tax relief. The loss of tax relief would see someone earning £120,000 per annum have their income tax increase by at least £6,900, with possibly even higher tax due to loss of Personal Allowance, although this would depend upon other income.

“Opting out and receiving the employer pension contribution as salary – At a time when the NHS is already facing a funding crisis, I find this proposal ill-thought out and lacking in understanding of the potential increased costs the NHS would face. The NHS currently contributes 20% of pensionable salary into the pension scheme and it is proposed that, if the member opts out, their NHS Trust would pay them these contributions as salary to ensure that they won’t be financially disadvantaged.

“If we again use our example of the Consultant earning £120,000, then they would receive an increase in salary of £24,000 by opting out but they would then incur 40% income tax on this payment, along with 2% National Insurance. In addition, as this would be paid as salary, the NHS would have to pay employers National Insurance of 13.8% on this salary, representing an increased cost to them compared to making a pension contribution. Again, analysis would have to be undertaken to see if the member would incur a lower tax liability through the Annual Allowance tax charge or receiving the contributions as salary. What about a member who opts out of the scheme for half of the year, would they only pay half contributions and receive half of the employer contributions as salary? Surely, this is an increased administrative burden on the NHS and likely to increase costs further.

“Scrap the Tapered Annual Allowance – The tapering of the Annual Allowance for higher earners since 2016 is the key piece of legislation that is causing most of the tax implications for senior professionals in NHS pension scheme. Scrapping this complex and highly punitive tax would be most welcome. However it and should apply to all pension funding not just members of the NHS pension scheme. I fear that the Government will choose to only remove this from NHS pension members, which would be grossly unfair and create a two-tier pension system that would further exacerbate the public-private sector pension divide. Even taking into account the tax charges currently being incurred by NHS pension members, the pension benefits they receive are still likely to be significantly greater than private sector workers who are members of their employer workplace pension schemes, possibly only contributing 8% of salary. I would urge the new Chancellor to make a bold statement and scrap this ill thought out, and complex piece of pension legislation, for all pension savers in the UK.”