Is the NHS Pension on the Cusp of a Major Change

Doctors’ pensions are taking up more and more news space as the staffing of the NHS service becomes critical. We are all hearing about doctors reducing their hours not only from a sanity perspective but also from the point of view of reducing their tax burden due to onerous Annual Allowance pension tax charges. However, things might be about to change.

Report for NHS Employers

A report to NHS Employers entitled ‘Research into the impact of pensions tax in the NHS’ has just been published. This report was carried out independently by First Actuarial, an actuarial consultancy firm.

This report does not really give us any particular information which we, as medical specialist accountants did not know already, i.e. that many of our clients, both GPs and hospital consultants are unfairly taxed as a result of being members of the NHS pension scheme. The main success of the report is that now the NHS has an independent report to confirm this, which we hope will kick start them into doing something to address the situation. First Actuarial were not able to come to any concrete solution to resolve the problem.

Issues which cause the additional tax charge

In January 2018 many of our clients were suddenly faced with unpredicted additional tax bills of just over £20,000! Many of our clients faced hardship as result. This was a severe oversight by the Government in not foreseeing the potential impact of a change in the law for 2016/17, introducing a tapering down of the Annual Allowance limit from £40,000 to a lowest limit of £10,000 further impacted by the fact that many people had exhausted the carry-forward of any excess from previous years. The issue, which has now been partially mitigated, was that this extra tax could not be paid by the ‘Scheme Pays Election’. This rule changed in October 2018 and this additional tax can now be paid by the Scheme if elected by the taxpayer. However, this does not get around the problem of the tax charge still being due. Electing for ‘Scheme Pays’ merely defers the payment and impacts on the final pension received.

How the issue arises

The main issue with regard to the NHS pension is that it is a Defined Benefit scheme which means that the amount of pension savings is assessed by the value of benefits accrued over the year – not the contributions paid to the scheme by the employer and the member. If you had the latter system, a Defined Contribution scheme, doctors could just restrict the amount of contributions to their relevant Annual Allowance but under the NHS, they have no power over what the ‘deemed’ contribution will be as it is calculated by referring to the growth in their pension which includes all their NHS earnings for the year. It is also an all or nothing rule, if you are in the NHS pension scheme all NHS earnings must be pensioned.

Mitigating the cost

We are now seeing many of our clients trying to mitigate this cost by:

• retiring as soon as possible, mostly at the 1995 retirement age of 60 but we are now beginning to see some retire earlier and accept an actuarily reduced pension;
• stopping contributions altogether if they are near retirement age and/or over the lifetime allowance particularly if they no longer have any dependants;
• temporarily coming out of the scheme and opting back in again the following year to reduce the impact of the annual earnings;
• setting up a limited company, which takes the earnings out of the scheme calculations, but this is now less of a possibility with the introduction of ‘off-payroll working’ (IR35)
• reducing additional responsibilities;
• reducing hours or sessions.

We are certainly seeing an increase in the latter with many more of our clients wanting to see the impact if they were to reduce the number of sessions. Very often, this does not impact that much on their overall income as so much disappears anyway through tax, NI and of course, pension contributions.

The greater worry is that the younger GPs are becoming more and more disillusioned with the NHS pension scheme altogether and, of course, it is they who fund it for those in retirement today. We have already seen the increase in employer contributions from 14.38% up to 20.6% to help improve the current underfunding of the scheme. However, for 19/20 this increase is being centrally funded.

The Conclusions of the Report

The report suggested three options:

1. 1. Reform the tax system

– This suggested changes to the Annual Allowance and even exempting doctors outright but the latter was dismissed by the Government. They were also not keen on changing the Annual Allowance including the taper as they felt that this was “necessary to deliver a fair system and protect the public finances”.

1. 2. Introduce flexibilities into the scheme

- 50:50 Option – This proposal was announced by Government on 3 June 2019. This would allow employees to halve their pension contributions for halving the rate of pension growth thus reducing the risk of both Annual Allowance and Lifetime Allowance charges. However, there are issues with this proposal and it is not very flexible.

- Pensionable pay caps – fixed caps on pensionable pay and pay rises or flexible caps on pensionable pay, allowing members to control their pensionable pay each year.

- Death-in-Service an Ill-Health only benefit – these are lost if a member opts out of the scheme and so a member could pay a lower contribution for this benefit alone.

- Defined Contribution Scheme – this scheme would be opened alongside the current NHS pension scheme; however, this would be paid to a separate pension provider.

1. 3. Greater provision of information

– It was recognised that the pensions tax system was very complex and that many members found the whole scheme difficult to navigate and could not get any reasonable information often finding that by the time they received a tax charge it was too late to alter their actions to avoid the charge.

Final Conclusion

The most likely result will be for a more flexible scheme which will give members greater control over their pension growth. However, with control comes uncertainty as to know what to do for the best and may lead to an even more complex system, which will in turn require the need to consult an Independent Financial Advisor. They conclude that it would be best if the system could be simple enough for members to make informed decisions of their own. Any solution will need to discourage opt-outs and try to maintain the contribution yield required by HM Treasury.

Our Conclusion

It is abundantly clear that something has to change within the NHS Pension Scheme to avoid a mass exodus not only of the Scheme but the NHS itself. The loss of senior staff cannot continue if we are to get more junior doctors to receive the training that they need from those most experienced and most qualified to give it. It is fairly clear that the Government will not change any current pension policies. So, the most likely outcome is more flexibility, probably with some sort of restriction, whether the 50:50 scheme or something similar. We just need to watch this space but what we do know is that nothing will happen quickly!

Finally, the NHS Pension Scheme is still the best pension scheme that money can buy because of its extensive benefits. We always recommend that clients take independent financial advice before making any significant changes.