With politicians under mounting pressure to reform the pensions of senior doctors, questions of fairness are under the spotlight
Chancellor Philip Hammond raised the eyebrows of advisers last week when he stood up in parliament and ruled out scrapping the tapered annual allowance. He argued it is necessary “to deliver a fair system and protect the public finances”.
He made the point in response to questions from MPs about senior NHS clinicians’ tax implications from the tapered annual allowance and annual allowance. They pointed out both allowances are forcing senior NHS doctors to retire early or do less work, and the government should step in to correct this problem.
Hammond went on to defend the current pension tax system as broadly fair because allowance breaches only affect the highest earners.
He also said the tax from the various allowances is expected to deliver £6bn in revenue a year.
Yet he did acknowledge there is some evidence the annual allowance charge is having an effect on retaining high-earning clinicians in the NHS. He added: “I am in discussions with the health secretary [Matt Hancock] about how to provide additional flexibility for NHS doctors affected by the annual allowance tax charge and he will make an announcement as soon as possible.”
Hammond’s view that the pension tax system is fundamentally sound, and the government has to balance the needs of the NHS against wider society, is worth exploring.
It quickly emerges that what people view as fair on pension benefits and tax relief is informed by their own circumstances. Similarly, these circumstances and the politics that emanate from them have also evolved.
Experts have widely different beliefs on whether the Treasury should even consider action to soften the blow of pension tax on NHS doctors, and the policy options that should be considered.
Time for action?
The political pressure on the government to take some type of radical action has been growing steadily over the past few months. In April, the British Medical Association wrote a strongly-worded letter to Hammond, warning doctors will start to reduce their working hours unless reforms are made to the NHS pension scheme.
At the time, BMA consultant committee chairman Dr Rob Harwood said: “Given the refusal of both the government and NHS employers to take steps to rectify or mitigate this, it is now our responsibility to inform our members that current regulations, particularly the annual allowance and tapered annual allowance, are disproportionately and unfairly impacting them.”
The BMA’s line about the annual allowance and tapered annual allowance disproportionately hitting its members has political resonance.
It draws attention to the assertion that high-paid NHS clinicians are being taxed in such a way that is unfair relative to other professions.
The line also puts an onus on the government to make a special dispensation in favour of doctors, since they provide essential public services.
In a way, the background noise is favourable for the health service as, last summer, the government promised to spend an extra £20bn annually on the NHS by 2023. Other politicians have issued repeated statements about supporting the health service after years of austerity and the more recent challenge of Brexit.
Former politicians such as Steve Webb have weighed in on the issue, with the ex-pensions minister recently calling for the Treasury to abolish the tapered annual allowance as quickly as possible.
Webb, who is now Royal London director of policy, says: “If the Treasury believes that higher earners are getting too great a share of the total cost of pension tax relief, it does not follow that the absurd complexity of the tapered annual allowance is the only answer.
“The tapered annual allowance has a ridiculous ‘cliff-edge’ which can cause marginal tax rates over 100 per cent and creates huge uncertainty for people who cannot predict what their total taxable income is going to be by the end of the financial year.
“When NHS consultants are turning down shifts because of the tax consequences of doing additional work, something has gone badly wrong, and tinkering with the NHS pension scheme will not resolve the problem.”
He adds: “Limiting tax relief for the highest earners could be better achieved by abolishing the tapering of the annual allowance and simply having a modest reduction in the across-the-board annual allowance to offset any lost revenue.
“This would make the tax system simpler and more predictable; two features that have been sadly lacking in recent changes.”
Director, Signpost Financial Planning
I struggle to see why one group of workers such as NHS doctors should be given a preferential pension tax treatment to other workers.
This issue highlights two things. Firstly, the NHS defined benefit scheme is miles more generous than most others; secondly, that limiting contributions will simply result in pensions that cannot support people in
There needs to be a rethink about what fair looks like, and defined contribution schemes need an equal treatment on the lifetime allowance relative to DB schemes.
‘Hammond is right’
Clearly, Webb is in the camp that thinks the NHS crisis deserves special attention from lawmakers, given the value he places on its role in society.
But there are others who do not consider it fair to make a rule change to placate a minority facing a tax problem. There is also the dilemma that as soon as you make a change for one group in society, that inevitably leads to calls from others to have the rules written in their favour as well.
James Hay head of technical support Neil MacGillivray says: “It’s not often that I say this, but I agree with the chancellor. The pension scheme for NHS doctors and GPs should not differ from others for two simple reasons.
“Firstly, they are members of a very generous pension scheme, one that most can only aspire to, which is unfunded and is therefore underpinned by the tax-paying public as a whole.
“Secondly, it would be unfair to facilitate exemptions for a relatively small group of individuals. If the chancellor were to treat the doctors and GPs as a special case, this would simply lead to other public sector employees advocating for the same treatment. Any changes cited would need to be fairly rolled out to all.
“For those doctors and GPs who find themselves in this situation, it is suggested they perhaps seek independent financial advice as the adviser may be able to propose options that could mitigate the tax charge.”
Confusing tax charges erode trust in pensions
The tapered annual allowance is a complex issue and it impacts more than just high earners because of the fear that is created by uncertainty for all. The headlines show trusted members of the community, such as doctors, getting unexpected tax charges on what is supposed to be a benefit provided to them, and this will erode trust in pensions generally, which I am sure isn’t the intended purpose of this test.
Making changes to any legislation just for a single profession or pension scheme would be admitting that the policy is fundamentally flawed, and ministers are unlikely to do this. In addition, it isn’t just members of the NHS scheme that are having these issues; other high earners in defined benefit schemes will be as well.
The difference is that many other pension schemes offer alternatives or provide a clearer way of dealing with scheme pays.
If scheme pays were clearer in the NHS, such that it showed a pending debit in pension terms rather than a loan amount, the member would be able to determine the impact of this on both their pension in retirement and their lifetime allowance.
Claire Trott is head of pensions technical at St James’s Place Group
Wider reforms needed?
Some commentators believe the experience of doctors within the NHS is evidence of how complicated the pension tax system is, and could be used to spur wider reform.
Intelligent Pensions technical director Fiona Tait says: “The NHS issues have simply focused a spotlight on the underlying problems with the annual allowance taper. The taper should be removed or at the very least rethought because it is artificial and unworkable, and not because of the effect on a single group of workers.
“I would like to see a return to the principles of simplification. Instead of a plethora of different allowances and tapers, I would prefer to see a single, lower annual allowance which affects everyone.
“This would still have a greater proportional effect on high earners as they are essentially the only ones who can afford to contribute up to £40,000 in one tax year.”
Tait also argues it is critical to understand the connection between related but distinct matters.
She adds: “There are two issues at play here: the implementation of the annual allowance taper and the reward structure of the NHS.
“If the issue is primarily affecting one group of employees, then the solution lies with that sector.
“If, as I believe is the case, the NHS issues are simply an example of a wider problem, then that is the time for the government to take action.
“Pensions are very long-term savings vehicles and many unforeseen issues have arisen when changes are brought in without the input of those who must implement them.
“A clear exception to this is the automatic enrolment initiative, which was designed by an independent commission with cross-party support.”
It appears any action the government takes to resolve the NHS issues could be fraught with difficultly, as there will always be a constituency that finds something unfair.
Curtis Banks pensions technical manager Jessica List says: “Wider changes to the annual allowance and lifetime allowance, and greater efforts to help people understand how their pensions work, could help all savers and not just doctors.
“The difficulties facing doctors have helped highlight that the current pension tax system does not always work to incentivise saving and is prohibitively difficult to understand.
“However, these issues are not exclusive to doctors. If significant changes are made to address these issues, they should affect all savers.
“Adding to already complex rules with further layers of exemptions and provisions for certain groups will not help in the longer term.”