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Government announces consultation for flexible NHS pensions

Written by: Emma Lunn
The Department of Health and Social Care’s proposals would offer more flexibility to senior clinicians in the NHS Pension Scheme.

Ministers are consulting on a new set of proposals to offer senior clinicians more control over their pension’s growth.

The move comes after news that senior NHS doctors were turning down shifts and retiring early to avoid punitive pension tax charges.

The consultation goes significantly beyond the 50:50 proposal put forward in July which would let clinicians halve their pension contributions in exchange for halving the rate of pension growth.

The new proposals include:

  • A ‘flexible accrual’ option where members can choose an accrual level in 10 per cent increments.
  • The option to ‘fine tune’ pension growth towards the end of the scheme year, when total earnings are clearer.

Ian Browne, pensions expert at Quilter, said: “It is laudable that the government has taken notice of the cacophony of unhappiness erupting from the medical profession after they proposed the 50:50 rule to try and fix the NHS pension debacle. However, the fact that we now have a second set of proposals for consultation in the space of just a few months shows that the Department of Health is chasing its tail trying to remedy the disastrous fallout from the Treasury’s annual allowance taper. These proposals are still likely to leave many doctors dissatisfied, and they will continue to face complex choices to mitigate the effects of the poorly conceived tax policy implemented in 2016.

Browne also pointed out that the government hasn’t acknowledged that the same challenges are facing other sectors. For example, figures show that a quarter of judges breached the annual allowance on pension contributions in 2017/2018, while just under 4,000 armed forces personnel were also hit by the tax charge.

“The government’s own ministers have rightly highlighted that there cannot be special tax arrangement for schemes in particular public sector vocations. The chief secretary to the Treasury, Liz Truss, has already acknowledged in parliament that creating different rules in the tax system for certain sectors is not a practical option as it risks discrepancies and tax arbitrage,” said Browne, “And yet today’s proposals show that NHS scheme rules have been tweaked so that it offers scheme pays on any tax charge, whereas other schemes are only obliged to step in when the charge exceeds £2,000.”

What’s the pension taper problem?

Introduced from April 2016, the policy reduces the annual allowance for pension savers with higher earnings, breaking the principal that all pension savers are entitled to relief at their marginal rate of income tax up to the same threshold allowance.

Instead, it penalises higher earners by curbing their entitlement to tax relief on contributions. Individuals with an ‘adjusted income’ of more than £150,000 and a ‘threshold income’ of more than £110,000 are affected.

For every £1 of ‘adjusted income’ over £150,000 an individual loses 50p of their annual allowance. This tapering effect means someone with income of £210,000 is left with an annual allowance of just £10,000, a 75 per cent reduction on the standard £40,000 annual allowance.

Quilter says the controversial policy has resulted in dire unintended consequences for key frontline workers in public services, especially the NHS. The taper is particularly damaging for workers in public sector DB schemes because of the way their pension accruals are calculated. Quilter is calling for the government to scrap the taper altogether.

A recent survey showed that nearly half of GPs had cut their hours to avoid triggering the punitive tax charge, while NHS trusts have reported delays to procedures because of staff shortages as a result of clinicians rejecting overtime.

Quilter has repeatedly campaigned against the policy, introducing a calculator to help savers navigate the tapered allowance, and calling on the newly appointed chancellor, Sajid Javid, to make reversing the policy one of his key priorities.

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