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Government finally acts on NHS pensions crisis

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Written by: Emma Lunn
07/08/2019
An NHS pension “tax trap” blamed for hospital consultants turning down extra shifts is set to be overhauled.

The department of health and social care will open a public consultation which proposes full flexibility over the amount senior clinicians put into their pension pots.

The health secretary, Matt Hancock, said the move would ensure doctors in England and Wales fully benefited from any extra work they took on.

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

The new proposals would mean senior clinicians could set the exact level of pension accrual at the start of each year. For example 30 per cent contributions for a 30 per cent accrual rate, or any other percentage in 10 per cent increments depending on their financial situation. This would give them room to take on additional work without breaching their annual allowance and facing tax charges.

Employers would then have the option to recycle their unused contribution back into the clinician’s salary. Alongside the proposals for full flexibility, HM Treasury will review how the tapered annual allowance supports the delivery of public services such as the NHS.

Hancock said: “These comprehensive proposals will give doctors the pension flexibilities they have called for and need to make sure they are rewarded for extra work. We are taking immediate action and I hope these flexibilities will encourage our top NHS staff to fulfil the dedication of their mission: to care for their fellow citizens in time of need.”

The NHS Pension Scheme is recognised as one of the most generous pension schemes available but the tapered annual allowance means some clinicians can face punitive tax rates.

The rules changed in 2016 and meant that people who earn more than £110,000 a year faced new limits on how much they could contribute to their pension. The rule change meant many senior doctors could end up paying tax rates of up to 90 per cent on a portion of their income – meaning overtime is simply not worth doing. The British Medical Association (BMA) warned last week that the current tax regime could destroy the NHS.

Steve Webb, director of policy at Royal London, said: “After months of pretending that there wasn’t a problem, and months more of suggesting that a tweak to the NHS pension scheme was all that was needed, this U-turn is welcome. In particular, the suggestion of a review of the ‘tapered annual allowance’ is long overdue.

“This problem is not unique to the NHS nor even just to the public sector, and so any review must be comprehensive and cover everyone affected by this absurdly complex taper, including in the private sector. The best solution by far would be outright abolition, even if this meant a slightly lower annual allowance across the board.”

But financial planning group Tilney said the proposals suggested a “complete lack of understanding” from the government and that the suggested measures would be unlikely to provide clarity for those currently affected.

Gary Smith, chartered financial planner at Tilney, said: “One of the proposals is to allow NHS consultants to alter their contributions into the NHS pension scheme to reduce or avoid potential tax charges for exceeding their annual pension contribution allowance. However, whilst this flexibility would work for members of defined contribution pension schemes, it will not be effective for defined benefit schemes, such as the NHS pension scheme, as it is not the amount contributed into the scheme that is tested against the annual allowance, rather the deemed increase in their pension benefits.

“It is also suggested that those affected could simply opt of the scheme this year to avoid annual allowance tax charges. However, by doing this, the member would lose out building up additional pension benefits, and this could have an impact upon their ability to retire, let alone preventing people from retiring early to avoid these tax charges.”

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