From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    NHS pension crisis – new proposals welcome as a start, more to do

    NHS pension crisis – new proposals welcome as a start, more to do

    • Glad to see Government proposing urgent action to address NHS Pension Crisis.
    • This is not about high earners but about fairness and transparency – these staff have been let down by their employer – that’s you and me!
    • More flexibility is a start but NHS must also acknowledge duty of care to staff who feel betrayed.
    • Government should also consider offering access to independent financial advice for NHS staff.
    • Ideally, the Annual Allowance taper should be scrapped – it’s far too complicated.

    Imagine you work in a public service job that can mean the difference between life and death. You are dedicated to your work, you are not paid nearly as much as top Directors and other professionals in the private sector, but you believe in what you do. Your employers have also always told you they will provide a great ‘guaranteed’ pension when you retire. So you diligently pay all the contributions they ask of you and trust the promises their promises.

    Now imagine your employer asks you to do overtime work, so that the vital work you provide can help more people. You agree to this willingly – your employer and the public need you, your work will benefit lives, so you are happy to do it. Or imagine you receive an award which gives you bonus pay in recognition of excellent service.

    The following year, you receive a tax demand for £100,000 because you did that overtime, or because you received that ‘bonus’. Unbeknown to you, your employer (the Government) has changed the pension rules, and you’ve inadvertently crossed an arbitrarily calculated pay threshold that nobody told you applied to you. This is because the pension your employer promised you was estimated to have increased ‘too much’ so you have breached the new rules. You have to pay back ‘assumed’ tax relief that you didn’t even know you had benefited from.

    This is the position many of the senior staff in the NHS have been placed in. Some consultants have had to remortgage their family homes to pay the charges. Others have had to find alternative ways to meet their bills.

    The Government and the NHS give you some options:

    • You can pay it as a lump sum
    • You can pay it over time but will be charged interest on it by HMRC (the Government) for late payment
    • You can ask your pension scheme to pay, but this means effectively borrowing money from your future pension at an interest rate well above commercial rates and reducing your pension

    If our employer behaved like this, would we be happy to do overtime again in future? If other staff, who don’t understand the complexities of this pension situation, hear about what has happened, would they agree to do overtime? Obviously, this situation will negatively impact the morale and willingness of staff to work extra shifts when needed. This also increases the costs of health provision, because hiring private sector or locum staff can cost around three times the amount paid to NHS employees

    All taxpayers have an interest in preserving the NHS and treating fairly those who work in it so dedicatedly. So any proposals that can help address the problem are welcome, but they need to tackle the issue effectively and rebuild staff morale.

    There are significant problems with the NHS pension scheme administration: The new rules for restricting pensions tax relief were not explained to NHS staff and, whereas other areas of the public and private sectors helped their members avoid these charges and mitigate their potential tax charge, the NHS has not done so. The issue was compounded by administration problems which caused delays in sending out Annual Pension statements and also by staff being moved, despite not wishing to, into a new scheme in 2015 which has turned out to have been illegal for most members. The Government will have to remedy problems caused by the new 2015 scheme, as well as dealing with the impact of the tapered Allowance. It is clear that there are major problems with the way NHS pensions have been handled, as well as wider issues with public sector schemes.

    What were the changes that affected NHS staff so profoundly? Most people are allowed to pay £40,000 into a pension each year, with tax relief – their Annual Allowance. However, for 2016 onwards, the Government announced new rules supposedly designed to reduce this Annual Allowance for those earning over £150,000. The £40,000 tax-relieved contribution would be reduced gradually (tapered by £1 for every £2 extra earnings) until anyone earning over £210,000 would only be allowed tax relief on contributions up to £10,000 a year.

    Taper rules are too complex and unpredictable: The new complex rules are impossible to properly predict, particularly for anyone in a final salary-type ‘Defined Benefit’ pension scheme, because they do not apply to your actual salary, nor to the amount of money that you personally pay into your pension scheme. The tax depends on your earnings PLUS the value of any extra pension that you are assumed to have earned during the year. This is not a figure that anyone will readily know or see. The Government has devised fiendishly complicated rules for calculating what your actual ‘tapered’ Annual Allowance will be, and NHS staff won’t know how much it was for that year until after it is finished. So they can’t easily plan ahead to avoid tax charges, nor can they undo anything after the fact.

    Government’s description of how the taper works is set out here: https://www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance

    If you do read this, unless you are a pensions professional, you are likely to find it bafflingly complex when it describes how to work out the reduced Annual Allowance for Defined Benefit schemes.

    The information explains that you need to calculate several pieces of information relating to your earnings and your pension, before you can work out whether you are affected by the tapered Annual Allowance, and how much your reduced Allowance was for the past year. Most people need a financial adviser to help them work out these figures. These are:

    1. net income (all earnings and unearned income, including benefits in kind).
    2. pension contribution (by you and your employer, or the ‘assumed’ contribution which is estimated as the growth in value of your Defined Benefit pensions over that year)
    3. threshold income (your income before pension contributions are taken into account)
    4. adjusted income (adjusted income is not just your earnings, but also includes dividends, savings interest, buy to let property, plus your own and your employers pension contributions)

    Working out how much your pension contribution for the year is assumed to be: You are supposed to deduct the ‘opening value’ of your future pension, from the ‘closing value’ for the pension input period. You see what I mean by complicated! Here is a bit more detail.

    You will need to have statements from your Defined Benefit pension scheme, showing the estimated value of your annual pension at the start of the tax year. The ‘opening value’ of your pension benefits are calculated as follows:

    • Start with your annual pension built up so far at the end of the previous pension input period.
    • Multiply this amount by 16.
    • Add any separate lump sum built up at the end of the previous pension input period.
    • Increase this by the Consumer Price Index for the previous September – this increased amount is your opening value.

    Then you will also need to know what your pension is assumed to have increased to over that year to work out the ‘closing value’ of your pension benefits. To do this you must:

    • Start with your annual pension built up at the end of the pension input period.
    • Multiply this amount by 16.
    • Add the value of any separate lump sum you would receive – this is your closing value.

    Finally, you deduct the ‘opening value’ from the ‘closing value’ to find out how much your pension contribution is assumed to have been.

    Unfortunately, even if NHS staff knew that they needed this information, the NHS scheme administration had significant problems and did not send annual statements out. Even after requesting information, staff faced long delays.

    Threshold Income: You then need to know your ‘threshold income’ – which is your income less the amount of your pension contribution. This is a stark cliff-edge. If your threshold income is less than £110,000 then you keep the full £40,000 Annual Allowance. However, if you have done a little overtime, or had a bonus, you may just go over the £110,000 limit and that triggers thousands of pounds in tax. So NHS staff could have inadvertently taken on an extra shift which actually caused them to lose huge sums of money.

    Adjusted income: Finally you need your ‘adjusted income’ which is the ‘threshold income’ plus the amount of pension increase you are assumed to have earned, which you calculated from your pension statements and the calculations outlined above.

    To be affected by the reduced Annual Allowance, your threshold income needs to be over £110,000 AND your ‘adjusted income’ needs to be over £150,000. For every £2 your adjusted income goes over £150,000, your annual allowance for that year reduces by £1. The minimum reduced annual allowance due to the taper rules is £10,000.

    Taper rules should be changed for all workers, not just NHS: I believe these rules are far too complicated and have clearly resulted in unintended consequences that need to be remedied. The proposal to allow more flexible accruals will only help if people can predict their income more accurately. I think these rules are unsuited to Defined Benefit pension scheme members and, if changes are made for NHS or other public sector staff, then they should apply to all workers.

    Why is this hitting so hard now? The rules allow you to carry over unused allowances from the past 3 years, so many staff were able to avoid high tax charges in the past few years but have now run out of carry-forward and are facing the full charge.

    And why could they not plan? The pension scheme is supposed to provide you with annual statements of your benefits, so you can see how much you and your employer may be paying. But unfortunately, the NHS scheme administration has had problems, so many of those who requested statements did not receive anything for a couple of years. But, even if you did have the information, you would only know how much your actual income and allowances would be after the end of the tax year. To plan ahead, you really need to have an expert independent financial adviser to help you. I hope that the NHS will offer and pay for its staff to get independent financial advice to help them plan their income and allay fears about the impact of the taper. Many consultants will not be affected, but if they are worried that they might be, and it is so complicated to work out, then they will understandably simply decide not to do the extra work, just in case.

    What did other employers do?

    Top Directors were offered higher pay in lieu of pension and the Government is now proposing to do this, by offering staff the employer contribution as an extra salary, instead of pension. This is a good idea and should be helpful.

    Other parts of the public sector allowed staff to accrue less pension and employee contributions are also lower. In the NHS, consultants and senior staff are contributing 13.5% or 14.5% of salary, which is much higher than other areas of the public sector, such as civil service.

    What else should the Government do?

    I would suggest a number of urgent measures are required, that would help NHS staff feel more confident about the way they will be treated by their employer. Surveys show that many are going to reduce their NHS work and also plan to retire early – this will add to the pressures on health services and the Government must urgently restore morale.

    • All staff should be offered access to advice from independent financial advisers who understand the workings of the NHS scheme and can help them plan their work and pension
    • Reduce or remove cost of ‘scheme pays’ so no interest is charged on the amount paid out. If those who do face tax charges for exceeding the reduced annual allowance are able to reduce their pension without the interest penalties, they would feel the system was fairer.
    • Change the way the taper works, so that the annual allowance is only reduced for the following tax year, not the previous one. This would get round the problem of retrospection and allow people to plan more confidently and adjust their pension contributions properly.

    Ideally, scrap the taper rules altogether. They are too complicated and, if there is a Lifetime Allowance, it seems illogical to also have an annual limit on contributions. There should be one or the other, not both.

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