Complicated pension rules are causing a staffing crisis in the NHS that critics claim is threatening patient care.
Doctors and other senior medical staff are being hit by limits on pension tax relief that affect all high earners.
But they are having damaging unintended consequences for the NHS and everyone relying on it, like longer waiting lists and delays to operations.
Pension tax relief: Complicated rules are causing a staffing crisis in the NHS, say critics
This is down to working practices in the health service – with doctors routinely expected to take overtime shifts, which now lay them open to shock tax bills.
Doctors and NHS institutions are at loggerheads with the Government over the issue, and have decried a proposed change to the NHS pension scheme which they believe won’t work.
What are the pension tax relief rules at the centre of the dispute, and how might they be changed to ease staffing pressures in the NHS?
Why are pension rules causing problems for doctors?
Pensions tax relief allows people to save for retirement out of untaxed income.
The rebate you get from the Government on your pension contributions is based on your income tax rate of 20 per cent, 40 per cent or 45 per cent.
That tilts the system in favour of the better-off, but it’s supposed to ensure you aren’t penalised by tax on your pension contributions, so if you earn enough to put more in your pot you get more back.
What does the Government say?
‘We want to make NHS pensions more flexible for senior clinicians, in response to evidence that shows this issue is having an impact on retention,’ said a Department of Health and Social Care spokesman.
‘We will carefully consider all views on our proposals.’
But there are two important caps on how much you can benefit from pension tax relief – the annual allowance and the lifetime allowances.
The annual allowance is the amount most people can put in a pension and get tax relief – including their own and their employer’s contributions, and tax relief from the Government – is £40,000.
But a complicated addition, commonly referred to as ‘the taper’, was introduced by former Chancellor George Osborne in the 2016/2017 tax year.
This means the annual allowance is gradually reduced from £40,000 to £10,000 for those whose total income, including any growth in their ‘pension rights’ over the year, is between £150,000 and £210,000.
However, tax charges can kick in if your income is over £110,000 a year because of the way pension rights are calculated, and these are especially difficult for workers to keep track of in salary-related schemes like the NHS one.
The longest serving NHS staff (meaning the most experienced medical professionals) might be simultaneously building up pensions under several successive versions of the scheme, based on both ‘final salary’ and ‘career average’ calculations.
And high earning doctors who work unpredictable overtime shifts to reduce waiting lists find it hard to work out how close they are to the £110,000 threshold.
As a result they are being hit by unexpected tax bills – some of five-figure sums – for making contributions towards a pension they might still be years away from drawing.
They don’t necessarily have large sums on hand to pay the taxman, and some have reportedly been forced to remortgage their homes.
The problem has started to hit really hard in the current tax year, because you are allowed to ‘carry forward’ unused annual allowance from the three previous tax years, which has eased the impact of the ‘taper’ up until now.
But it was introduced in April 2016, so that is no longer an option for many people.
Meanwhile the lifetime allowance, the total you can put in your pension and get tax relief, currently stands at £1,055,000 for everyone.
That also creates a headache if you go over the limit, because you face a tax charge of 55 per cent on any lump sum you take from retirement savings in excess of it, or 25 per cent if you are taking an income.
It can nevertheless still be worth paying into a pension after breaching the lifetime allowance if your employer is also putting in contributions. Read more here.
Royal London explains how the NHS pension scheme works and the impact of pension tax relief rules on its top-earning members in detail here.
What is the reaction in the medical profession?
Doctors are retiring early, turning down shifts, and refusing to take additional roles in areas like research to avoid getting landed with stiff tax bills, according to reports of widespread disruption caused by the pension rules.
This causes problems in planning and managing staffing levels, longer waiting lists, and work being allocated work to less senior staff, according to reports.
There could also be knock-on effects for the armed forces, due to a shortage of medics.
NHS Providers, the membership organisation for hospital, mental health, community and ambulance services, issued a strong warning this week.
‘Trust leaders report that significant numbers of key clinical and managerial staff can no longer afford to work extra shifts and weekends because of the way that the pension taxation rules currently work,’ it said
‘Multiple trusts tell us they are having to delay surgery because of gaps in rotas. Trusts are also worried that these issues are one of the reasons for the current NHS performance problems in emergency care.’
The group’s chief executive, Chris Hopson, added: ‘To quote two examples we’ve heard just this week.
‘A senior anesthetist who worked 27 Saturdays last year to reduce waiting lists has now said he cannot afford to work any extra Saturday shifts this year because it would give him a large tax bill he cannot afford to pay.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
‘Another trust’s medical director, a senior A&E consultant who routinely worked most Sundays last year, and was key to providing safe emergency care for that trust, is now unable to work any Sunday for similar reasons.
‘In both cases, the trust’s performance and the quality of patient care risks being compromised.
‘This is now an immediate, major, problem for the NHS. Trust leaders are saying the impact is growing rapidly.
‘We have multiple trusts telling us they are expecting a significant increase in the number of surgery cases they will have to delay, leaving patients in pain and risking their problems getting much worse.’
The British Medical Association said on its website in June that hard work was being rewarded with penalties, and that the NHS pension scheme for doctors was ‘in a horrible fix’
‘Senior doctors are cutting their hours, retiring early and turning down extra responsibilities or shifts because of the machinations of punitive pension rules,’ it said.
‘Rules on their tax-free annual pension allowance are “rewarding” this extra work or responsibility with tax bills not remuneration as you’d expect.
‘In an increasing number of cases, doctors are billed more than they’d earn for going the extra mile.’
What are the possible solutions?
Pension experts have criticised the annual allowance ‘taper’ as unnecessarily complicated for years.
It’s now become a high profile issue, because doctors are very visible high earners whose skills everyone else demonstrably relies on.
The best paid doctors – and therefore most affected by these pension rules – are those with the longest work record and experience, who are in heavy demand.
To resolve the issue, the Government is consulting on proposals to allow doctors to halve their pension contributions, in exchange for halving their rate of pension growth.
Chris Hopson says: ‘It has now become clear that the government’s proposal to solve NHS pensions problems announced a month ago, whilst welcome, is insufficient.
‘We were waiting to see if the proposal would work and it clearly hasn’t. Staff are voting with their feet.’
He added: ‘They must recognise that their initial answer hasn’t worked and something more is needed really fast.
‘We can’t wait for a long drawn out consultation process on their initial proposal, which is the current plan.’
Former Pensions Minister Steve Webb, who is now policy director at Royal London, said: ‘It has to be a priority for the new Chancellor to tackle this issue.
‘No-one objects to limiting pension tax relief for higher earners, but the way it is being done is absurdly complex and is having unintended consequences for the NHS.
‘Tweaking the NHS pension scheme would simply be a sticking plaster response. The “tapered” annual allowance needs to be abolished and replaced with a simpler across-the-board limit on pension contributions.’
What has gone wrong – and how do you fix it?
‘There is no doubt that senior clinicians receive salaries well in excess of those enjoyed by the large majority of the population, nor that the pension scheme to which they have access is one of the most generous in the land,’ concludes a Royal London policy paper on fixing the issue.
‘But it also seems clear that if the government’s attempts to limit the cost of pension tax relief have led to some doctors retiring early, others cutting back on the number of shifts they work, and many more spending a lot of time understanding the finer points of the tax system, then something has gone wrong.’
It goes on: ‘By far the cleanest solution to this problem would be to abolish the tapered annual allowance. It creates unwelcome cliff-edges in the tax system and makes taxation appear arbitrary and capricious to taxpayers in a way that is never desirable.’
A Royal London report on the issue calls the taper ‘a fundamentally rotten system’ which was ‘one of the worst examples of unnecessary complexity in tax legislation in living memory’. See the box on the right.
Gary Smith, chartered financial planner at Tilney, said: ‘The Chancellor Philip Hammond has ruled out scrapping the tapered pension allowance, but has proposed making the NHS scheme more flexible, with a mooted 50:50 arrangement that would allow members to reduce the amount put in their pension to avoid the tax charges.
‘However, our analysis shows that while such a move might help address the issue of tax charges, it would leave senior NHS staff no better off than if they incurred the tax charges, so is little more than a mirage.
‘The likelihood of a new Chancellor being appointed following the imminent change of Prime Minister might be an opportunity for a more fundamental rethink on the tapered allowance – introduced by George Osborne – which is widely perceived as unfair.
‘While controlling the cost of pension tax relief is understandable for Government, there are much simpler solutions, like a lower annual allowance or a flat rate of relief for all.’
A flat rate option would see lower earners taxed at the basic rate of 20 per cent get an extra Government boost to their pots at the outset – and see the value of their pensions rise as a result – while those on 40 or 45 per cent wouldn’t get back their full whack of tax any longer.
Read more here about why this would be controversial and likely to face opposition.
TOP SIPPS FOR DIY PENSION INVESTORS