The Government is consulting on new proposals to provide increased flexibility for senior clinicians in the NHS Pension Scheme (NHSPS) who are exceeding their annual pensions tax limits.
The consultation follows the Government's acknowledgement that high-earning clinicians are managing their pensions tax liability by reducing their workload, turning down extra responsibilities and/or retiring early, which is affecting NHS service capacity and patient care.
What flexibility is on offer?
As we mentioned a few weeks ago, the Government is consulting on an arrangement that will allow senior clinicians to set their level of pension accrual each year. Whilst originally it was suggested that senior clinicians would be able to set their level of pension accrual only at the start of each scheme year (1 April), the Government is now considering taking this further by allowing clinicians to adjust their level of accrual towards the end of the scheme year as well.
The consultation proposes that the clinician chooses an accrual level based on a percentage of the normal scheme accrual level in 10% increments. There would be an equivalent adjustment to the contributions paid by the clinician. For example, the clinician could elect for 50% accrual with 50% contributions or 30:30 or 70:70. The minimum accrual would be 10% with 10% contributions.
The Government recognises that continued membership of the NHSPS entitles the clinician to other benefits, such as death benefits and ill health benefits. These need to continue to be funded but to allow a "zero accrual option" whereby clinicians cease to accrue pension benefits but still receive the ancillary benefits would alter the purpose of the NHSPS, something the Government is unable, or unwilling, to do.
To deal with the issue of clinicians having variable income, they will have the option of "fine tuning" their chosen accrual rate by being able to increase it once they have a better understanding of their earnings for that year. It is important to note however that any increase to the level of accrual will then apply for the full scheme year, meaning that the clinician and the employer would need to pay additional contributions before the end of the scheme year to cover any additional payments required to meet the new accrual rate.
There is no option for clinicians to decrease their accrual rate during a scheme year, and so they will need to take care not to set their accrual rate too high at the start of the scheme year. However, setting it too low could mean that clinicians want to increase their accrual part way through the year but do not have the funds available to meet the backdated payments required.
NHS employers will still have the option to pay clinicians any unused employer contributions as salary, an option some employers are already utilising (as mentioned in our previous article). However, recognising that clinicians and employers will need to pay retrospective contributions if the clinician elects to increase the accrual rate during the scheme year, the Government suggests that employers could choose to pay any unused employer contributions as a non-recurrent lump sum at the end of the scheme year. This could assist clinicians in being able to meet at least some of their own contribution arrears.
The Government recognises that unexpected one-off salary payments and large pay increases can result in large pensions tax charges for that year. It is therefore consulting on an option to allow clinicians to determine how much of the payment should be pensionable initially with the ability to increase the amount that is treated as pensionable over time, effectively "phasing in" a greater amount of pensionable pay over a number of years to avoid spikes in pension growth. This is a separate flexibility to adjusting the accrual rate and clinicians could choose to adopt either or both options to manage their pensions growth.
Other ways the Government intends to help
Change to scheme pays
"Scheme pays" is a mechanism by which members can pay an annual allowance tax charge by choosing to have the amount (plus interest) deducted from the value of their pension. This means that they do not need to use their own income or savings to pay the pensions tax bill.
Currently this works by keeping a record of the amount of the tax charge plus interest up to retirement, and then converting this amount into a pension amount at the point of retirement. This is then deducted from the clinician's pension. The issue with this approach is that clinicians will not know the amount of the reduction until they retire. The Government is therefore proposing to switch to a "debit" method which instead deducts the tax charge amount from the clinician's pension in the year in which the charge arises, rather than at retirement. This would help clinicians to assess their actual level of pension savings rather than having a large tax charge hanging over them until retirement.
Connected to the change to scheme pays, the Government intends to make more information available to clinicians through commissioning a modeller that can be tailored to personal circumstances. The modeller, along with annual member benefit statements providing details of scheme pays deductions, will mean that clinicians can more easily access the information that they need to identify how their choices will affect the level of their pension growth.
The consultation closes on 1 November 2019.