NHS Pension Scheme: Pension Flexibility

Following on from my article “Is the NHS Pension Scheme on the Cusp of a Major Change”, I am now going to consider the latest proposals on NHS Pension Flexibility. Moves to change the NHS Pension scheme are taking on a pace as the shortage of doctors in the NHS continues to impact staffing levels in all areas and the situation becomes more critical.

Consultation Document on NHS Pension Flexibility

On 11^th September a consultation document was published by the Department of Health and Social Care to tackle the current significant financial concerns of doctors who are adversely affected by the current taxation regime, which is causing them to consider reducing their work commitments. This follows on from the report to NHS Employers entitled ‘Research into the impact of pensions tax in the NHS’ which was carried out independently by First Actuarial, an actuarial consultancy firm. This further consultation document has also come about due to the criticism of an initial proposal to offer a 50:50 option, which was considered to lack enough flexibility.

The consultation document is considering greater flexibility of the scheme, including differing rates of accrual, the ability to change this rate during the scheme year, making the cost of using ‘Scheme Pays’ clearer and phasing the ‘pensionability’ of large pay increases for high earners in hospital.

Flexible Accrual Rates

As the 50:50 option was widely criticised for its lack of flexibility, the proposal is now offering a new ‘flexible accrual’ facility.

Members will be able to choose the rate of accrual at the start of each tax year. These will be available at 10% increments and the employee contributions will reduce to the same rate, e.g. 30% accrual with 30% contributions. Doctors will be able to set their accrual rate at what they estimate to be a ‘safe’ level which will be unlikely to lead to a tax charge. This should help, particularly now that most staff have now exhausted any carry forward reserves and so are now feeling the full impact of the tax charge. It also enables easier management of the build up to the lifetime allowance limit, currently £1.055m.

Update the Accrual Rate Later in the Year

As the tax year progresses, members will be able to ‘fine tune’ their pension growth towards the end of the scheme year by updating their chosen accrual level when they are clearer as to what their earnings for the year will be. Those GPs with an accounting year other than March will have a particular advantage over those who do, as they may have had their accounts prepared to allow them to be much more accurate with their estimates of earnings.

Where the member has elected to increase their accrual level later in the year, both the member and the employer are required to pay the higher backdated contributions by the end of the scheme year for the higher level to apply during that year.

Continuation of Ancillary Benefits

The proposal confirms that ancillary benefits, such as ‘death in service’ life assurance, survivor benefits and ill-health retirement cover would continue to be provided in full. Clearly, this will mean that the employer contribution will need to be much higher than the employee contribution to account for the cost of this provision. The precise contribution rates at each 10% accrual increment will be determined on the final policy design following the consultation.

A zero accrual rate is not likely to be offered for those who have reached their lifetime allowance limit and do not want to accrue any further pension benefits but wish to continue active benefits. 10% is likely to be the minimum accrual rate.

Unused Employer Contribution

It is proposed that the employer, who in the case of hospital doctors is likely to be the local NHS trust, would have the discretion to pay any unused employer contribution up to the standard amount if it is not required to cover the additional costs. It should be noted that in the case of GP partners, the unused employer contribution is already retained within the practice as it is included in the payment received for performing their primary care contract. The partner who is paying lower contributions would keep it, in the same way that those who have opted out of the scheme keep their gross share of profits.

If employers decide to add the value of unused employer contributions to staff pay, they would pay the balance as a non-recurrent lump sum at the end of the year. Such a payment will contribute toward the member’s threshold income for the purpose of assessing whether they are subject to the tapered annual allowance.

Significant One-off Pay Increments for Hospital Doctors

One-off substantial increases in pensionable pay can create a spike in pension growth and a higher annual allowance tax charge in the related year for hospital doctors. The Department of Health (DOH) is consulting on the principle of phasing the ‘pensionability’ of large pay increases for high-earners to avoid this particular scenario.

Offer of Support to Understand the Complexity of the Pension Scheme

We all know the complete confusion the changes to the pension scheme have caused and the time it has taken for doctors to try and get to grips with the complexity of the situation. The DOH has recognised this fact and it is planning to commission a modeller to help individuals assess their options. The aim of this new service will be to enable staff to apply these new flexibilities to their personal circumstances so that they can tailor them for their own benefit. This will be offered in the hope that they will now be able to take on additional clinical work and responsibilities. It should be noted that this modeller will not constitute financial advice.

Understanding the Cost of Making the Scheme Pays Election

Most doctors will know that if there is a tax charge liability, it is possible to make a Scheme Pays election, whereby the NHS Pension Scheme will pay the charge to HMRC on their behalf. The election must be made by 31^st July of the year following the relevant tax year, i.e. the deadline for the tax year ended 5^th April 2019 (the tax returns we are currently completing for you now), is 31^st July 2020.

The NHS Business Services Authority (BSA), as scheme administrator, must issue mandatory Annual Allowance Pension Saving Statements by the later of 6^th October following the end of the relevant tax year, or within three months of all the relevant information being received, i.e. for GPs, their Pension Certificate. This date may well be after the Scheme Pays deadline of 31^st July. Therefore, the Scheme Pays election needs to be an estimated figure which can be altered up to four years later.

However, there have been concerns about the impact the Scheme Pays election will have on the final pension. Electing for Scheme Pays is effectively NHS Pensions making a loan which incurs interest and this is recovered when the benefits are crystallised, but currently there is no way of calculating what this cost might be. The consultation proposes an alternative method that seeks to provide greater transparency for the members. This would involve annual member benefit statements showing the Scheme Pays deduction as a pension charge so that they can see the adjustment to their pension at retirement as it increases with interest each year and compare this with how the accrued pension also increases over time.

Changes to the Taxation Regime

Changes to the general taxation regime were thought to be unlikely. As I mentioned before, the Annual Allowance including the taper were felt to be “necessary to deliver a fair system and protect the public finances”. However, the Government is now consulting on removing the tapered annual allowance for defined benefit schemes such as the NHS Pension. If this were to happened these pension flexibilities would not go ahead. Any changes would require legislation which, with the Government lacking a majority would take some time to go through.

Conclusion

This consultation document is to be welcomed and we would hope that the majority of it will be adopted. However, the general complexity of the system will sadly, no doubt, remain and the uncertainty of future planning will also continue to be an issue. Whether these changes will actually achieve the Government’s desired result of halting the current trend of doctors reducing their NHS work to avoid breaching their Annual Allowance remains to be seen.

Despite all of the above, with the current uncertainties over the potential changes to tax legislation it is difficult to be positive about the situation and we may find that no changes are made to the NHS Pension Scheme at all!

The consultation ends on 1^st November and if adopted is expected to come into force for the 2020/21 scheme year.

Finally, we would reiterate that 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.