New consultation fails to address NHS clinician concerns

The situation is at crisis point. More and more doctors are being caught by the tapered annual pensions allowance, with nearly 17,000 NHS scheme members breaching the limit each year, according to a freedom of information request from Quilter. The Department of Health and Social Care estimates a third of consultants and GPs have turned down extra shifts. 

To remedy the worst effects of the unintended consequences of George Osborne’s tax legislation, aconsultation from the DHSC published on September 11 proposes a “flexible accrual” option.

The personal administrative costs needed, to get to a position where you have a worse pension but avoid some extra tax, aren't worth it. I certainly won't be doing more work if these changes come in

Nicholas Grundy, GP Survival

Senior clinicians would be able to choose an accrual level reduction in 10 per cent increments at the start of the scheme year and the option to “fine tune” pension growth towards the end of the scheme year, when total earnings are clearer. In this way, doctors can avoid excessive tax penalties as a result of overstepping the annual allowance.

The announcement replaces the earlier government consultation proposing the widely criticised 50:50 option. Under this option, affected NHS scheme members would have been given the option to halve their pension accrual, and in return pay 50 per cent lower contributions as a way of mitigating the tax impact. This option did not give scheme members enough flexibility to avoid potentially huge tax bills.

Admin difficulties still frustrate GPs

Dr Nicholas Grundy, chair of lobby group GP Survival, says for GPs the new proposal is “not significantly better than the status quo. It relies on being able to estimate pension growth, and because [Primary Care Support England and] Capita have lost years of GPs’ pensions contributions, most cannot access accurate pension records with NHS Pensions, and so they will never get a timely nor accurate estimate of pension growth. In addition, GP partners can’t predict their income as hospital doctors can”.

He adds: “It will need an enormous amount of administrative and financial housekeeping from GPs, and require that to be done through a system in Capita, which has repeatedly demonstrated it is incapable of processing data accurately.”

This will not get GPs doing extra work. “The personal administrative costs needed, to get to a position where you have a worse pension but avoid some extra tax, aren't worth it. I certainly won't be doing more work if these changes come in,” says Dr Grundy.

“What would work is allowing NHS staff of all sorts to say to NHS Pensions that they wish to contribute to the scheme up to the point at which they hit the annual allowance, and then stop. NHS Pensions could then calculate where that was. That would still be worse than what was on offer until this ludicrous tax was introduced, but it might persuade me to do extra work.”

BMA maintains call to scrap taper

The British Medical Association’s consultants committee deputy co-chair, Dr Phil De Warren-Penny, says while the “options within this consultation will help alleviate the issues, they will not resolve it”.

He adds: “To succeed we need to see NHS employers doing their part and recycling all of the employer contributions. If they don’t, it’s still an effective pay cut for doctors for doing extra shifts.

“The real heart of the problem is the tapered annual allowance, which must be removed along with the annual allowance and lifetime allowance. Only when these are removed can doctors return to working extra shifts to help remove waiting list backlogs and support colleagues where there are rota gaps, without fear of receiving huge tax bills.”

The proposal will also add considerably to the complexity of both scheme administration and employee choice. Steven Cameron, pensions director at Aegon, says that “it is questionable how often this will be used in practice”.

Alongside the proposals for flexibility, the Treasury will review how the tapered annual allowance supports the delivery of public services such as the NHS. 

Introduced from April 2016, the tapered annual allowance penalises higher earners by curbing their entitlement to tax relief on contributions. Individuals with an adjusted income of more than £150,000 and a threshold income of more than £110,000 are affected.

This tapering effect means someone with an income of £210,000 is left with an annual allowance of just £10,000, a 75% reduction on the standard £40,000 annual allowance.

Experts warn on wider impact

The annual allowance restrictions and taper in particular have wreaked havoc across the whole public sector, affecting the recruitment of senior judges with vacancies climbing.

Indeed, Ian Browne, pensions expert at Quilter, says: “Judges and the military are both suffering with the exact same problem, with one in four judges now breaching the annual allowance and just fewer than 4000 armed forces personnel also getting hit by the tax charge.”

He adds: “Rather than fiddle around trying to find workarounds for this growing problem, the government should be looking to scrap the taper altogether as this is quite clearly the root cause of the problem. In one fell swoop you could alleviate this pension problem threatening the public sector.”

Nilesh Shah, executive pensions associate at Barnett Waddingham, agrees: “It is difficult to see how many of the complexities of the current tapered annual allowance, or indeed the tax burden, could be reduced unless the annual allowance taper is scrapped.”

The government is also consulting on allowing high-earning staff who receive a large pay increase entitling them to a large increase pension, potentially producing a tax charge, to instead phase the increased pension entitlement over a number of years. Mr Cameron wants equality of treatment across the whole sector. “If this is permitted, then the government must make it clear that the equivalent provisions can be built into private sector pension scheme rules.”

The whole pensions tax system is in need of a radical overhaul. Wes Jones, head of pensions, Manchester, at XPS Group, says: “The current limits are radically different from the position at A-Day and the number of people affected by the various limits is much higher than ever anticipated at the outset.”

He adds: “Some of the problems we are seeing are due to attempting to have a single regime that covers both defined benefit and defined contribution pension arrangements, which are fundamentally different. The lifetime allowance should be removed entirely for DC schemes.

“For DB schemes, I would like to see the lifetime allowance retained, and instead remove the annual allowance or set it back to a level that only affects a handful of very high earners.”

The consultation closes on November 1 2019.