Over the last few weeks, the issue surrounding NHS staff and their pension scheme has been hard to ignore. As medical staff cut their hours to avoid significant tax charges, the knock-on effect on patient care has made national headlines.
So, what is the issue? How might it affect your healthcare? And what can be done to mitigate the problems?
The NHS pensions crisis explained
Contributions into pensions generally attract tax relief. As this tax relief is relatively generous, the government restricts the amount of tax relief that an individual can claim through an ‘annual allowance’. This Annual Allowance currently stands at £40,000.
Essentially, if you pay more than £40,000 into your pension in a tax year, you can only claim tax relief on the first £40,000.
For higher earners, a stricter regime applies to annual contributions. This is known as the ‘tapered’ annual allowance and applies to people who have both:
- ‘Threshold’ income of over £110,000 a year (total taxable income net of the value of any employee pension contributions); and
- ‘Adjusted’ income of over £150,000 a year (total taxable income plus the real growth of pension rights over the year).
If an individual ticks both these boxes, their annual allowance is reduced by £1 for every £2 of adjusted income they receive above £150,000. Those with an adjusted income over £210,000 will have their annual allowance tapered to just £10,000 meaning that they can only claim tax relief on the first £10,000 of their pension contributions.
These rules are causing significant problems for many NHS staff for three main reasons.
- The complexity of the rules
For many NHS staff, it is extremely difficult to work out whether they have an annual allowance issue.
For example, they may have rights under different sections of the NHS pension scheme – for example, a final salary pension and a ‘career average’ pension. The way that Defined Benefit pension rights are tested against the Annual Allowance is also complex, and whether the tapered annual allowance applies depends not just on whether their ‘adjusted’ income is over £150,000 but whether their ‘threshold income’ is over £110,000. Adjusted income, in particular, is calculated in a very complicated way.
- The unpredictable nature of NHS staff earnings
The tapered annual allowance uses income for the current year to determine the size of the annual allowance for the current year. The problem with this is that many NHS consultants and surgeons work extra NHS shifts (and undertake private work) and may have little idea what their income for the year is going to be until very late.
This makes it virtually impossible to know what their annual allowance will be for the year they are in. A doctor who does a lot of extra work late in the year could suddenly find they have an annual allowance issue that they did not expect when they were making pension contributions earlier in the year.
- The ‘cliff edge’ at earnings of £110,000
While the tapered annual allowance results in a gradual reduction in annual allowance for each pound of adjusted income above £150,000 per year, the fact that the whole system kicks in for threshold income above £110,000 can create a violent ‘cliff edge’ effect.
Doctors with threshold income of £109,999 a year can effectively ignore the taper. However, staff who earn £110,001 a year:
- Pay income tax equivalent to 40p on each extra pound
- Lose personal allowance equivalent to another 20p in the pound
- Face a large drop in their annual allowance, resulting in large lump-sum bills
Of course, while the NHS problems have generated most column inches it’s not just healthcare staff who are affected. Other public sector employees are facing similar issues, with members of the judiciary and the armed forces also breaching the annual allowance limit.
Indeed, research has revealed that there has been a fourfold increase in the number of armed forces personnel exceeding the annual allowance limit since 2015/16. A total of 3,840 members of the Armed Forces Pension Scheme breached the limit in 2017/18.
How could the pensions issue affect your health?
A recent survey by the British Medical Association found that 42% of GPs and 30% of hospital consultants have already reduced their working hours because of actual or potential tax charges. A further 34% of GPs and 40% of consultants say they are planning to follow suit.
This has resulted in operations and clinics being cancelled. The Guardian reports that ‘the fiasco was blamed for an increase in waiting times and led to cancer scans going unread for as long as six weeks’.
Chris Hopson, chief executive of NHS Providers, says the ongoing problems are having a “significant and direct negative impact” on patient care. “We won’t enable key staff to work the extra hours needed and put off ideas of early retirement until we have a clear, definitive solution fully in place. So, we have to move fast.”
The HCSA union, representing hospital doctors, have also warned that the problems are set to cause a “winter meltdown” in the NHS.
Dr Claudia Paoloni, President of the HCSA, says: “It is fantasy to pretend that a little bit more flexibility, or distant promises of a Treasury review, will reverse the current descent into chaos within our hospitals.
“We are heading for a full-blown winter meltdown as a result of the government’s inaction on the NHS pensions crisis. A fifth of senior hospital doctors plan to quit in the next 36 months or have already left as a result of the issue.”
Potential options for mitigating its effects
It’s important to remember that it’s not illegal for you to exceed your pensions Annual Allowance, but that there will be consequences for doing so. The tax charge you’ll face on any contributions above the allowance is simply a way of the Exchequer clawing back the value of any tax relief granted in excess of the relevant limits.
Depending on your circumstances, there may be situations in which it is entirely sensible to build up pension rights even if this incurs a tax charge. For example, because a large part of the pension rights built up in the NHS scheme (and most other public sector schemes) is paid for by an employer contribution, the extra pension built up – even after allowing for a tax charge – can still be greater than the amount that would be saved by opting out.
Here are five other ways you can tackle the issue of the tapered annual allowance.
- Consider making extra personal pension contributions – this could reduce your threshold income to under £110,000.
- Stop contributing – this may avoid the tax charge, but opting out of a scheme could mean you’d lose valuable employer contributions.
- Reduce your income – if you can control your income you could reduce the amount you take from your business.
- Use your spouse’s allowance – married couples looking to take a joint approach to their retirement planning can consider maximising the annual allowance of both spouses. For example, if one spouse earns £60,000 but only pays £20,000 into their pension, you could increase this contribution to £40,000 and benefit from tax relief.
- Consider a Lifetime ISA – if you’re lucky enough to be under the age of 40, a Lifetime ISA lets you save £4,000 of your annual ISA allowance (currently £20,000) into a tax-efficient investment, and the government will give you a bonus of £1 for every £4 you save (up to a maximum of £1,000 per tax year). This bonus is paid monthly so you’ll also benefit from compound growth. Note that any withdrawal before the age of 60 incurs a 25% penalty, unless you’re using it to buy your first home.
Get in touch
If your income is more than £110,000 then you could be affected by the tapered Annual Allowance. If your income is more than £150,000, you almost certainly will.
As Chartered Financial Planners we can give you the right advice for your situation. So, if you need help with your pension planning or retirement saving, get in touch. Email firstname.lastname@example.org or call us on 01454 416653.