The British Medical Association has warned that the number of doctors choosing to reduce hours or retire early would increase were the government to proceed with reported plans to freeze the pensions lifetime allowance past 2026.
The lifetime allowance rules put a cap on the amount that can be saved into a pension, which is currently £1,073,100. Anything saved into a pension over this amount is taxed at a much higher rate, currently sitting at 55 per cent for lump sum withdrawals.
Changes to the rules would drag all workers with pension pots close to the allowance limit into paying additional tax, with one expert warning that the phenomenon of early retirements in the health service could be replicated across the workforce.
Another squeeze on LTA limits would only make matters worse — just at a point when the pressures on the NHS mean we need to retain these key people
Sir Steve Webb, LCP
The proportion of GPs retiring has risen
The statement from the BMA followed Telegraph reporting that the government is considering freezing the LTA for two years after 2026.
Dr Vishal Sharma, BMA consultants committee chair, said: “This will not only leave our most senior doctors with little option but to retire early, it will also leave many senior nurses and other NHS workers facing the same situation.”
Almost half of consultants are planning to leave or take a break from the NHS in the next year, citing pay erosion and pension rules, so a change like this will no doubt push even more to take that decision, added Sharma.
“We know the proportion of GPs retiring early has increased more than three-fold since 2008, closely following the real-terms reduction in the lifetime allowance,” said Sharma.
Quilter NHS pension specialist Graham Crossley said: “There has been a correlation between the reduction in lifetime allowance and the numbers of retiring healthcare workers since it was first reduced from £1.8mn.”
But there is now an even greater risk of an acceleration in the number of healthcare workers retiring if this change were to happen. Crossley said: “That’s because medics are much more aware of the negative impact of LTA freezes than they were in the past.”
In addition, the mismatch between wage increases not matching inflation and pension payments being linked to cost price increases could further accelerate this trend, said Crossley.
For example, if a healthcare worker is at the lifetime allowance limit, any subsequent pension growth would then be subject to a 25 per cent capital value charge.
If that healthcare worker were to stay in the scheme, if their pensionable pay increases by 2 per cent, the pension they have accrued in the past also increases 2 per cent and this part of extra growth is subject to an LTA capital charge.
But if the worker were to retire this year, the LTA assessment is carried out now, so there will be no subsequent charges.
“While they will miss out on the additional 2 per cent increase in their wages, their pensions income will increase in line with inflation,” Crossley said.
In other words, freezing the LTA along with inflation-linked pension benefits is creating a perverse incentive for senior healthcare workers to retire early. Crossley said: “The longer LTA is frozen; the more healthcare workers will be incentivised to leave.”
LCP partner Sir Steve Webb said: “Another squeeze on LTA limits would only make matters worse — just at a point when the pressures on the NHS mean we need to retain these key people.”
In a written question submitted on October 17, Ruth Cadbury, Labour MP for Brentford and Isleworth, asked what impact the government's policy on NHS pension taxation would have on workforce numbers in NHS England.
On November 3, Will Quince, minister of state in the Department of Health and Social Care, replied: “The vast majority of NHS staff are able to build pensions tax-free.
“However, the generosity of the scheme and well-remunerated careers means that some senior clinicians exceed their allowances for tax-free saving.”
Others could leave work early
Freezing the LTA does not only impact healthcare workers but all employees with a pension pot value close to the allowance limit.
Aegon head of pensions Kate Smith said: “Freezing the LTA will drag more people into paying additional tax because inflation will increase the number of people reaching this value.” Even over the past year, the number of people paying tax has increased, she added.
Just as senior healthcare workers have become incentivised to leave work early, this could happen to the broader working population as they become more aware of the negative tax implications of staying in employment, Smith said.
Inflation not only draws more people in the LTA but it also erodes the real value of pension.
Willis Towers Watson senior consultant David Robbins said: “If the LTA had been increased in line with actual inflation, it would now be £1.224mn.” In other words, the LTA is 12 per cent lower than it would have been with indexation.
To avoid the workplace consequences of freezing the lifetime allowance, the government should look at reinstating the LTA’s inflation-linkage from 2026, said Smith.
Robbins continued: “Freezing the LTA in cash-terms rather than indexing it to cost prices means its real value will fluctuate with inflation levels.” The longer inflation persists, the more this nominal value is reduced.
Interactive investor personal finance editor Alice Guy said: “A pension pot worth more than £1mn may seem enormous but it translates to an annual defined benefit pension of £53,655.”
For an employee with defined contribution pension, the current LTA stretches much less than for those with a DB pension.
Guy said: “A pot of £1,073,100 would provide an income of around £32,193 per year if they withdraw 3 per cent per year from their pension, which is close to current average salary in the UK.”
Consultation required
The Telegraph also reported that the government is examining cutting tax relief for high earners. At the moment, higher earners receive 40 per cent tax relief on pensions investments and this could be reduced to 20 per cent.
Adviser finds errors in nearly 20% of NHS pension records
An NHS pensions expert has identified mistakes in almost one in five pension records, having spotted misallocated arrears that artificially inflated a member’s pension growth, which would have otherwise triggered a £15,000 annual allowance charge.
Smith said: “If the government is serious about reducing tax relief, it would need to consult on this first because it’s a complex issue which needs careful thought about how it could be implemented.”
It is much more difficult to implement for DB than DC and would need careful consideration to make sure it was fair across both, she added.
Robbins said: “It is a myth that higher rate tax relief is a low hanging fruit which is easy for the Treasury to pick.”
