Following concerns that pensions tax charges are forcing experienced staff out of the NHS Pension Scheme (NHSPS) and impacting services for patients, the Government has announced that it will be consulting on proposals to make pensions more flexible for NHS clinicians.
Although it is the NHSPS that has made the news, the underlying problem extends more widely and affects other public sector pension plans and many private sector plans. We look at the problem the NHSPS faces, the broader ramifications of this issue and its proposed solution, and consider some of the inventive "work-arounds" that have been adopted in the absence of Government action.
A growing problem
The British Medical Association (BMA) has referred to a "perfect pensions storm" facing the NHS, caused by the interaction of the reduction in the lifetime allowance (the limit on all tax-relieved pension savings over a lifetime) from £1.25m to £1m and the introduction of the "tapered" annual allowance (the limit on tax-relieved pension savings over a year for high earners) in April 2016. Even before these changes, there had been significant reductions in the limits since 2010 when the lifetime allowance was £1.8m and the annual allowance was £255,000.
In simple terms, the tapered allowance rules provide that a saver's annual allowance (which is currently £40,000) is reduced by £1 for every £2 of income over £150,000 (which includes the value of pension savings and non-pensionable pay). This means that the tapering rules can reduce a high earner's annual allowance to £10,000.
By including non-pensionable pay in calculating the tapered annual allowance, clinical excellence awards, private clinic work, on-call and overtime are causing clinicians to be caught by the allowance, even though the work is not pensionable. It is also making it difficult for clinicians to plan for the impact of the tapered allowance; planning requires an ability to predict their income but the unpredictable nature of the elements included in the calculation makes this almost impossible to do.
In previous years many have taken advantage of the ability to carry over unused annual allowance in the previous three pension years into the current year, but this was always going to be a wasting resource and many senior clinicians are now finding that they have no extra allowance available.
Whilst clinicians can opt out of accruing pension in the NHSPS, ceasing to make contributions would lead to the clinicians losing an assortment of associated benefits such as death-in-service cover and would reduce the overall value of their benefits package. Understandably, this is a last resort for all but the most financially-comfortable NHS staff.
So clinicians are now finding themselves facing tax bills of tens of thousands of pounds at a point in their career when their experience is vital to the NHS. What incentive is there for them to work the hours needed for frontline care to be delivered?
The Government announced on 3 June 2019 that it would consult on a "50:50 option". This would allow clinicians to halve their pension contributions to the NHSPS and thereby halve the rate of pension growth and reduce any associated tax charge. Because they remain members of the plan, they retain their ancillary benefits, such as death-in-service cover. This option has existed in the Local Government Pension Scheme (LGPS) since 2014, albeit not necessarily to address the pensions tax issue, and not because the LGPS was at risk of losing critical staff or staff working to strict hours in the same way that the NHS now is.
However, the proposal was criticised by the BMA and others as being too restrictive. After a change in the political scene and much lobbying by the BMA, employers and clinicians, the Government announced on 6 August 2019 that it would instead consult on plans to allow senior clinicians to set their level of pension accrual at the start of each year with an option for employers to recycle unused employer pension contributions back into the clinician's salary. The Government intends for these changes to take effect from April 2020.
In addition to the administrative problems involved in keeping track of a large number of pension accrual limits each year, the BMA has suggested that this is just a sticking plaster for a more fundamental problem and is calling for tax reform for savers in the medical community.
The former Chancellor of the Exchequer, Philip Hammond, had ruled out making changes to the pensions tax system. He felt that it was already very generous and stated that the tapered allowance was intended to make the system fairer by reducing the share of pensions tax relief that went to higher rate taxpayers. However, the new Chancellor, Sajid Javid, has said that HM Treasury will "review how the tapered annual allowance supports the delivery of public services such as the NHS". The NHS certainly cannot afford to lose UK nationals from its frontline staff, given the real possibility that many non-UK EU citizens working in the NHS today may not be able to continue working in the UK after Brexit. So there may be more changes to come.
Are there other options?
Given the complexities of the existing tax regime and the obvious pitfalls of providing a different pensions saving regime for one group of employees over the rest of the tax-paying public, it is perhaps understandable that the Government is taking its time over this issue.
However in the interim local NHS trusts have been trying a number of work-arounds to retain affected staff and thereby continue to provide services to the public.
Our Public & Voluntary Pensions specialists have advised a number of clients on providing clinicians who have opted out of the NHSPS with the option of receiving the employer's pension contributions that would have been payable as additional pay instead. The NHS Employers' organisation has recently cited this approach as a possible short-term solution.
The "cash alternative" approach mirrors that taken by many companies in the private sector where either there is no benefit to senior staff in accruing pension due to the tax charges on additional saving, or the staff members have tax protected pension savings which would be lost were they to accrue any additional savings.
Another alternative some of our clients consider is to pay consultant clinicians through limited liability partnerships (LLPs) so that their payments are not subject to pension contributions. This would follow the practice of a number of providers of outsourced NHS services in the private sector.
However, in both cases there are legal risks and drawbacks. These include compliance with automatic enrolment duties, tax considerations and the loss of the ancillary benefits available to members of the NHSPS. Therefore, the Government's proposal to offer more flexibility within the NHSPS may be seen as preferable if trusts are able to wait until April 2020.
What about everyone else?
As mentioned, this pensions tax issue is not limited to the NHS. Steve Webb, the former pensions minister, has suggested that any review of the tapered annual allowance should cover the private sector as well as the public sector.
This allowance, and its interaction with the reduced lifetime allowance, is a perfect example of the short-term tinkering that has occurred since the introduction of the current pensions saving regime by the Finance Act 2004. What was supposed to be a simplified system whereby everyone had a clear set of rules by which they could work out how to save for their pension has become so complicated that it acts as an active barrier to pensions saving that is seriously damaging public service provision.