Pensions taper is bad medicine for the NHS and should be ditched

However, a recent squeeze on tax breaks for higher earners saving for retirement is producing such bad outcomes for wider society that it should be reviewed.

One such change is the tapered annual allowance, introduced in 2016 and aimed at clawing back billions of pounds in pensions tax relief handed each year to high earners.

The tapered annual allowance sees the standard allowance whittled down from £40,000 to £10,000 for those with “adjusted” yearly incomes of more than £150,000 and “threshold” incomes of more than £110,000.

In the absence of ways to mitigate the risk of pension tax bills, large numbers of consultants are cutting back their hours or retiring early. At a time when the NHS is already under severe pressure, these actions are having a direct impact on patient care

When the taper was announced it was described as “horrific” and “nightmarish” by pensions experts because of “fiendishly” complex rules around when a reduction to the allowance is triggered.

The taper is particularly difficult for members of defined benefit pension schemes, who cannot easily predict how much their pension will grow each year if they have variable income, or get a pay rise or promotion.

But it is also causing problems for private sector defined contribution savers, particularly for those with fluctuating income as an individual’s tapered annual allowance cannot be known until after all their income is counted at the end of the year. A crystal ball is needed to check whether pension contributions planned for that year won’t breach the taper.

Given this cunning design, it is hardly a surprise the taper is proving a boon for HM Treasury coffers, which has raked in hundreds of millions in tax charges for taper breaches.

The reasons for the introduction of the taper were sound enough. The lion’s share of the £25bn or so annual net cost of pensions tax relief is racked up by higher and top rate earners, who are in least need of help from the taxpayer to fund their retirement.

Tax hits key public services

But far from hitting the City fat cats, who can take steps to swerve the taper, in reality it is wreaking havoc on key public sector workers, with large numbers of senior hospital doctors and GPs cutting their hours, or retiring early, to avoid landing in the taper zone.

The reason why the taper is having such a pernicious effect on the NHS is that unlike the private sector, staff have few options to avert these tax bills, such as asking their employer to swap pension for cash, or to reduce their pension contributions.

Doctors getting pay rises, promotions, or working extra shifts to help clear a patient backlog, are getting landed with shock six-figure tax charges as high as £87,000 in some cases.

In a particularly egregious anomaly, senior doctors working overtime to help the NHS are facing marginal tax rates of more than 100 per cent due to taper charges.  

In the absence of ways to mitigate the risk of pension tax bills, large numbers of consultants are cutting back their hours or retiring early. At a time when the NHS is already under severe pressure, these actions are having a direct impact on patient care.

There may not be much sympathy for doctors on six-figure salaries who have good DB pensions that millions in the private sector can only dream of having. However, the problems caused by the taper on the NHS were foreseeable in 2015. There is no evidence the Treasury had evaluated the impact of the taper on vital medical staff.

Wider public sector afflicted

Taper headaches are not confined to the NHS, with senior police, firefighters, teachers and military personnel also running into similar problems.

Some may argue the taper is serving its purpose by curbing tax relief in areas where it is seen as most costly: the public sector. But this is coming at a high price with a workforce crisis in the NHS deepening, which is bad news for us all.

There are more sensible and saner ways to tackle the costs of tax relief than ill-conceived policies that cause such perverse outcomes. Even financial advisers making money from advising clients on the taper say it is too complex, unfair and should go. Instead, a wholesale review of the lifetime and annual allowance, across the DB and DC pension landscapes, should be undertaken.

George Osborne, the former chancellor, had the chance to do this in 2015 but opted for more piecemeal changes.

Further reforms of pensions tax relief will not come without pain or pushback, particularly in the public sector, but the Treasury cannot ignore the impact of the taper. It is bad medicine for us all and needs to be scrapped.