Widen taper consultation to fix pensions tax system, experts say

In response to widespread dissatisfaction with its July efforts to stop experienced NHS staff retiring early, the Department for Health and Social Care announced a fresh consultation on Wednesday, turning to consider not just NHS Pension Scheme solutions but the operation of the taper.

The consultation will also propose full flexibility over the amount senior clinicians put in their pension pots, replacing the 50:50 proposal put forward previously.

The Treasury needs to stop playing whack-a-mole with pension tax policy; all you end up with is trickle-down complexity

Tom McPhail, Hargreaves Lansdowne

However, the work by HM Treasury will examine “how the tapered annual allowance supports the delivery of public services such as the NHS”, leading many to fear a two-tiered system, with differing treatment for public and private sector workers.

Chancellor of the exchequer, Sajid Javid, said: “This government is committed to ensuring that British people see a real difference in public services, including getting quicker GP appointments and a reduction in waiting times.”

He added: “Critical to that is introducing flexibility into the system so that our hospitals have the staff they need to deliver high-quality patient care, which is why we’ve listened to concerns and will be reviewing the operation of the tapered annual allowance.”

Taper must be scrapped

Tom McPhail, Hargreaves Lansdown head of policy,  said the current system is broken: “A situation where key workers are discouraged from taking on over-time and performing socially valuable work because they’ll face punitive tax charges is plainly bonkers.”

But he added: “This problem is not confined to NHS employees, or even just public sector workers, and it isn’t just the tapered annual allowance which is the problem. The Treasury needs to stop playing whack-a-mole with pension tax policy; all you end up with is trickle-down complexity.

“Every time they come up with another quick-fix solution to one pension problem, they make the overall situation worse."

Administrators equally frustrated

Karen Goldschmidt, chair of the Association of Consulting Actuaries’ pensions taxation committee, said schemes and their trustees also encounter difficulties under the current system: “The tapered annual allowance is unutterably complicated, both for the individuals impacted and for pension schemes, which carry much of the burden of trying to make the system work.

“The complexity is exacerbated for defined benefit schemes, like the NHS Scheme. The complexity means that in many cases the wrong tax will be paid – which is not the right way to design a tax system.”

Patrick Bloomfield, partner at Hymans Robertson, agreed: “Pension tax changes have created cost and distraction across the whole private sector, it’s not just an NHS issue. Successive governments’ tinkering with pension tax to balance the national books has led us to a ludicrous situation where saving for retirement is unnecessarily hard for many people.” 

He added: “No employer should need to invent convoluted work-arounds to provide a decent pension without detrimental tax consequences for their staff. Complex rules that keep changing put people off saving, which is in nobody’s interests. Pensions tax doesn’t need a workaround or a quick fix – the Treasury needs to take a long hard look at the pension tax system and come up with something simple that works, then stop tinkering with it.”

This is a view the British Dental Association and the Fire Brigades Union share, as they plan to lobby the government to extend the proposed flexibilities of the NHS pension for higher earners to their members.

Holes remain in NHS plan

Starting from the next financial year, the new rules would allow senior clinicians to set the exact level of pension accrual at the start of each year.

For example, 30 per cent contributions for a 30 per cent accrual rate, or any other percentage in 10 per cent increments depending on their financial situation. This would give them room to take on additional work without breaching their annual allowance and facing tax charges.

Employers would then have the option to recycle their unused contribution back into the clinician’s salary.

But Dr Nicholas Grundy, chair of GP Survival, pointed to problems with the proposals: “They are limiting the option to ‘senior clinicians’ – it should be offered to all NHS employees, managers included. They are important too, and although they're not cutting shifts in the way doctors are, it disincentivises them to do additional work.”

He added that employers “must also be obliged to 'recycle' contributions into employees’ salary and the government must commit itself to 'recycling' the entire contribution back to the employee”.

Sir Steve Webb, director of policy at Royal London, said a review of the tapered annual allowance is long overdue. 

He highlighted that the problem is not unique to the NHS or the public sector. “Any review must be comprehensive and cover everyone affected by this absurdly complex taper, including in the private sector. The best solution by far would be outright abolition, even if this meant a slightly lower annual allowance across the board.”

The proposed changes will also create a huge need for high-quality financial advice. Mr Webb said: “Doctors will now face an annual choice of contribution rates between 0 per cent and 100 per cent, and may have to review their decision late in the financial year. Decisions to give up valuable pension rights should not be taken lightly or hurriedly, and there is a risk that new options will be available before the necessary advice infrastructure is in place.”