Government prescribes a solution to doctors’ pension predicament
Flexing contributions to the NHS pension scheme may solve the problem which has led to doctors reducing their working hours to avoid excessive tax charges in respective of pension contributions.
This arises from pension tax charges for high earners. In the case of the NHS, these are consultants and GP partners. Changes to the tax regime since 2016 have exposed individuals to tax charges which can lead to either reductions in take-home pay, reduced final pension entitlements, or both.
In an attempt to mitigate these effects, some clinicians have chosen either to retire early or to reduce the amount of work they undertake for the NHS, as Simon Nicol explained in April.
The Department of Health and Social Care (DHSC) is consulting on possible changes to the NHS Pension Scheme to reduce this effect and to incentivise senior clinicians to devote their energies to the NHS.
Pension tax charges
The tax charges increasingly affecting high earning doctors are:
Lifetime allowance charge
If the total value of a member’s pension rights on retirement (lump sum plus pension) exceeds £1.055m, there is a tax charge. On current values within the NHS Scheme, this equates to a pension of £46,000 per annum plus a lump sum of £138,000. Excesses are taxable at 55% if taken as a lump sum or 25% if used to purchase additional pension.
Annual allowance charge
If a member’s rights under their pension scheme increase in any fiscal year by more than the individual’s annual allowance (AA), the surplus is taxable at their marginal tax rate – up to 45% or 46% in Scotland.
For members of the NHS scheme, the standard AA (£40,000) represents an additional annual accrual of around £2,500 of final pension entitlement.
However, since 2016 individuals earning over £210,000 have a tapered AA of only £10,000 which equates to an accrual of £625 of final pension.
Options for change
As it stands, the NHS Scheme is totally inflexible. The level of contributions and the level at which members accrue pension rights are set by the individual’s earnings. The only way in which senior clinicians can reduce their exposure to tax charges is to do less work for the NHS – with the consequent risk of shortfalls in service levels.
The DHSC is suggesting a tailored range of options to add flexibility.
Members can choose a level of contributions and accrual before the start of the year, in 10% increments. This would enable someone to choose an accrual rate (for example 30% of maximum) which they were confident should not trigger any tax charges, and to make regular contributions at the same rate.
Towards the end of the year, members can increase their accrual level once they know the likely level of earnings for the year. The adjustment would be in 10% increments and the contributions would be increased in step.
Since the increase in contribution level would have retrospective effect back to the start of the year, any increased contributions would need to be paid before the year-end.
Death in service insurance, survivor’s pensions and ill-health retirement cover would continue to be provided (and paid for) at current levels.
If a member has elected to contribute a reduced amount, the employer’s contributions will also be reduced, although not to the same extent, since ancillary benefits are funded out of employer contributions.
It will be open to employers to pay any net reduction in contribution cost to the member as taxable earnings (a lump sum at year-end).
No zero accrual
The government believes that the minimum level of contribution and accrual should be 10% of the maximum contribution. It would be inappropriate for the ancillary benefits to be provided if no actual pension rights were accruing.
In any event, at a 10% accrual rate, it would require pensionable earnings of around £340,000 before even a small tax charge could arise.
A substantial one-off increase in earnings (such as a promotion) could still trigger a one-off exposure to the annual allowance charge. This spike in earnings might be smoothed out by phasing in the “pensionability” of the rise over a three year period: in year one, only 50% of the increase might be counted, and 75% in year two, with the full amount only being considered in the third year.
This approach would be more beneficial to high earners nearer the end of their careers, while more junior clinicians might find it acted to their disadvantage. If the pension is based on a career average salary, more junior doctors would want to get the higher amount on their pension record as quickly as possible.
Who will be affected?
The DHSC proposes to limit the changes to those who need them. This cannot be achieved simplistically, such as by offering the new options to all employees earning over a given amount or to all clinicians regardless of earnings.
It is proposed that to qualify for flexible accrual an individual must both:
- be employed in a role that requires registration with an appropriate healthcare regulatory body; and
- demonstrate a reasonable expectation that their prospective NHS commitments would result in pension growth exceeding their annual allowance.
The DHSC believes that its proposals would not fall foul of the Equalities Act 2010 but welcomes opinions on their impact. Here the department is taking note of the Court of Appeal’s judgment (McCloud and Sergeant) that transitional changes to the Judges’ Pension Scheme and the Firefighters Pension Scheme were unlawfully discriminatory on the grounds of age.
If you have views on the questions asked in the consultation document, send your input to the DHSC by midnight on 1 November 2019, or post them below and AccountingWEB will submit a reply on behalf of all members.