Solutions to NHS pension problems

The NHS pension scheme is a subject that is never too far away from grabbing industry – and national – headlines.

Only last month, the Health and Social Care Committee of MPs called it ‘a national scandal’ that NHS pension arrangements are the reason why so many senior medical staff have reduced their hours and/or retired earlier than they would have otherwise. This followed hot on the heels of a House of Commons debate lamenting the ‘punitive’ tax charges doctors and others face which are forcing them out of the profession.

The Treasury has already taken steps to sort out the tapered annual allowance, raising the income thresholds up to £240,000 for the adjusted income and £200,000 for the threshold income for this tax year. Although that has gone some way to making sure the majority of doctors are now removed from the effect of the taper, the BMA (British Medical Association) is calling on the Government to make further pension changes.

Its key point is that the standard annual allowance of £40,000 could be breached by a pay increase or a promotion (which will only worsen as monetary pay increases rise), and the lifetime allowance (frozen at £1,073,100 until April 2026) means more senior NHS staff will see their pension benefits eroded by tax charges. Although, as we know, defined benefit schemes are treated more generously for lifetime allowance purposes than defined contribution schemes.

This NHS pensions furore could prove to be the spark that ignites a bonfire of pension tax legislation.

The Government, faced with these continued calls, could consider change. The BMA is calling on it to introduce a tax unregistered top-up pension scheme for senior doctors, similar to the one introduced for judges. By reducing their tax charges, the hope is doctors could be tempted to keep working on. But there are other professions whose pension wealth is similarly affected who may feel aggrieved at such favouritism.

Another option is to shake up the pensions tax legislation for everyone. It seems ridiculous pensions face two different ways of limiting provision – one on the money on the way in, and one on the money on the way out. A simpler solution would be to split pensions into two distinct camps with different rules; only apply the lifetime allowance to those in defined benefit schemes, and a single (probably lower) annual allowance to those saving in defined contribution schemes.

This would no longer penalise defined contribution savers for good investment performance, at a time the UK government is keen we invest more to help UK plc not retract further away. And removing the complicated web of annual allowances would help those saving in a defined benefit scheme who have no real influence over how much their employer is deemed to pay on their behalf, and therefore no control over minimising any resultant tax charges.

Of course, if it was that simple, it would have been done already. Ensuring a proper split between the two forms of pension provision will always present some challenges. After all, we still want the ability to allow people to go from one side of the fence to another and take their pensions with them. But it shouldn’t be beyond the industry and Treasury to devise a fair way of doing that.

This approach won’t completely solve the NHS pension woes. Even if they don’t face an annual allowance charge, senior NHS staff will still have a frozen lifetime allowance, and their final benefits may still be reduced by a lifetime allowance charge. (Which is why the BMA would prefer the option of a new unregistered scheme.)

After years of tinkering with the current allowances, and the likelihood of inflationary wages, the pensions tax system is creaking most alarmingly. It remains to be seen if the pressure from the BMA is enough to make the Treasury review its options.

This article was previously published by Money Marketing.