NHS pensions: new consultation offers more complications

Estimated reading time: 4 minutes

The UK Government has now launched their consultation paper on increasing flexibility within the NHS Pension Scheme. They outline that they are accessing a new set of proposals to offer senior clinicians more control over their pensions growth, so they can continue to provide the best services to their patients.

Whilst this may be welcome news for a huge number of affected NHS Pension Scheme members, senior NHS clinicians are concerned that pension tax charges are making them retire early or change their working habits. These plans go beyond the 50:50 flexibility previously proposed. 

What do the new NHS pension proposals include?

There are two key points:

  • A ‘flexible accrual’ option where members can choose an accrual level in 10% increments (so instead of 50:50 they can choose any of the following: 10:90, 20:80, 30:70, 40:60 , and also 60:40., 70:30, 80:20 and 90:10.
  • The option to ‘fine tune’ pension growth towards the end of the scheme year, when total earnings are clearer.

In the article below, Nilesh Shah provides more background into these concerns.

"The annual allowance taper should be ’scrapped’ for all tax payers, doctors as well as all others..."
Nilesh Shah Barnett Waddingham

Background: The Tapered Annual Allowance

The Tapered Annual Allowance was born from an attempt by the Government in 2016 to restrict the benefit of tax-relief on pension savings for higher earners. In short, from 2016/17 anyone with taxable income over £110,000pa could see their pensions Annual Allowance cut from the standard £40,000 to as little as £10,000.

The problems with the operation of this Tapered Annual Allowance, have been the subject of discussion within the pensions industry for some time before Paul Masterson MP raised the specific NHS Pension Scheme issue at a House of Commons debate in April 2019, in the process dubbing the annual allowance taper as “boring and incredibly complex”.

NHS consultants and doctors have increasingly found themselves having to refuse additional shifts because the tax charges arising on the increased pension benefits outweighed the increased take-home pay. These staff are paradoxically therefore financially worse-off from having worked extra hours.

The problem is not necessarily unique to the NHS Pension Scheme. The Tapered Annual Allowance affects many other defined benefit (DB) pension scheme members – both in the public and private sectors.

Treasury to consult on NHS pensions

The recent announcement from the Department of Health and Social Care (DHSC) replaces the previous and widely criticised 50:50 option.

Under the 50:50 option, affected NHS Pension Scheme members would have been given the option to halve their pension accrual and in return, pay 50% lower contributions as a way of mitigating the tax impact. This option did not however, give scheme members the full flexibility that they needed to avoid potentially huge tax bills, and so the DHSC is now proposing that individuals can choose the level of reduction – from 0 to 100% in 10% increments.

The new flexible accrual proposal means that affected NHS Pension Scheme members will have to make any decision to reduce pension accrual at the start of each year. Towards the end of the scheme year they will have the option of increasing (but not decreasing) the chosen accrual rate which will have retrospective effect from the start of the scheme year.

This could still leave individuals limited by the option they select at the beginning of the year and may therefore result in additional hours being turned down as individuals approach tax limits.

Where clinicians use the flexibilities to choose a lower accrual level than the full rate, the employer will also pay lower contributions. Employers will have the discretion to pay to the member unused employer contributions in these circumstances, although this would be a decision for individual employers.

HM Treasury to review Tapered Annual Allowance

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

Barnett Waddingham’s view

We agree with other commentators that any changes to the pension taxation system must apply identically to everyone in the same situation, regardless of their employer. It should be available to private sector senior staff also.

The Annual Allowance taper should be 'scrapped' for all tax payers, doctors as well as all others.

These new proposals are further complications to an already complex situation and will require senior staff to seek specialist guidance for pensions.

Pension planning for senior NHS staff

Doctors and senior NHS staff can read our full briefing note to help make sense of the Tapered Annual Allowance and related pension taxation rules.

Find out more

At Barnett Waddingham, we understand the challenges facing senior NHS staff in managing the tax burdens imposed by the complex pensions taxation legislation. With our extensive knowledge of the issues surrounding pension provision for NHS staff, we can provide a bespoke and specialised service designed to meet each individual’s requirements. Contact our specialist team for further information.