08 May 2019

Finding the right medicine - how to fix the problems between doctors and their pension scheme

5 min read

With growing reports of senior NHS staff cutting their hours or even retiring because of pension tax issues, Royal London has published a new policy paper explaining the issue and reviewing the various solutions on offer.

One doctor spoken to by Royal London in preparation of this report said that action was needed ‘so that consultants can go back to talking about patients rather than pensions’. Others pointed out that NHS ‘waiting time initiatives’ to drive down patient waits were being undermined by the effects of the pension tax regime.  Doctors reported inventing ‘DIY’ solutions to these issues including what has become known as the ‘hokey-cokey’ approach, involving being a member of the NHS pension scheme for one month, opting out for eleven and then repeating the process again the next year in order to avoid big tax bills.

Key conclusions of the report include:

-          This issue is likely to bite much more in 2019/20  than in previous years;  this is because the ability to ‘carry forward’ unused annual allowances from up to three previous years will now only go back to 2016/17 – the first year when the tapered annual allowance was in force;  previously, doctors could ‘carry forward’ from 2015/16 when no reduction applied;

-          One option – favoured by the Chancellor in his recent evidence to the Treasury Committee – is to make changes within the NHS Pension Scheme and/or NHS pay arrangements;  but the report finds that these would largely be ‘sticking plaster’ solutions for a more fundamental problem

-          The best solution would be to remove a complex and unpredictable feature of the tax system – the tapered annual allowance – even if this required a reduction in the overall annual allowance;

Commenting, Steve Webb, Director of Policy at Royal London said:

“It is utterly absurd that doctors are having to consider their pension tax position before deciding whether or not to take on an additional shift or cover for an absent colleague.  The NHS is structured around senior clinicians taking on additional roles and responsibilities and this whole culture is being undermined by a bewildering system of pension tax relief.  Rather than tinkering with the NHS pension scheme, the Treasury should abolish the ludicrous and capricious system of tapering annual allowances for tax relief.   Patient care must not continue to suffer on the altar of Treasury intransigence”.

The new policy paper: “Finding the right medicine – solving the problems between doctors and their pension schemes” begins by explaining the current system of pension tax relief, including the system of ‘tapering’ annual limits on contributions for those on higher incomes.  It points out that the system contains an unwelcome ‘cliff edge’ whereby a small amount of extra earnings can trigger a large tax bill.

Next, the paper reviews options for reforming the NHS pension scheme, noting that other schemes such as the Local Government Pension Scheme and the Universities Superannuation Scheme have been swifter to offer new flexibilities to members.  LGPS now offers members the chance of a 50-50 arrangement where they can pay half contributions for half benefits.  This would reduce (though not eliminate) the problems faced by some doctors.   But none of these changes would deal with the underlying problem of a highly complex and unpredictable tax regime.

The paper therefore looks at the wider system of pension tax relief and at potential reforms which could be brought in relatively quickly to address this issue.  It notes that the tapering of the annual allowance does not just affect doctors but also affects self-employed people, those receiving bonuses, and anyone else whose annual income is unpredictable.  The paper concludes that reform of the tapered annual allowance would not go far enough and that outright abolition is required.  If the Treasury decided that it did not want the overall cost of tax relief to increase, the paper notes that a simple across-the-board reduction in maximum limits on annual contributions would probably be required.

Notes to editors:

1. The policy paper – ‘Finding the right medicine – solving the problem between doctors and their pension scheme’ is available at www.royallondon.com/policy-papers

2. In addition to the explanation in the policy paper, the gov.uk website provides a description of the working of the ‘tapered’ annual allowance here – the very complexity of this explanation shows why doctors often have little idea where they stand: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance


For further information please contact:

Royal London Press Office

About Royal London

Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £130 billion, 8.8 million policies in force and 4,046 employees. Figures quoted are as at June 2019.

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