- NHS pension crisis won’t be resolved by raising Tapered Annual Allowance threshold.
- Senior staff need certainty that their pension ‘benefits’ do not become a costly penalty for extra work.
- Government must abolish unworkable taper rules, not just tweak them.
- I have suggested my own 10-point action plan for addressing the crisis.
It is of course reasonable for the Government to look to control the costs of tax incentives: The TAA was originally announced as reducing the £40,000 annual contributions allowance of people earning over £150,000, with the annual allowance reducing gradually to £10000 for those considered to be earning over £210,000. That sounded reasonable when announced, but the rules were made impenetrably complex and impossible for almost anyone to work out for pension planning purposes. In fact, staff earning much less than this – even those earning well under £100,000 a year – have been hit. They had no warning that they would be impacted and no chance to protect their position. Policy aims need to be achieved fairly, transparently and in ways that enable people to plan properly.
Changing thresholds fails to address this fundamental flaw in TAA design: Rumours that the Government has proposed just tweaking the thresholds for its damaging Tapered Annual Allowance (TAA) pension rules would not solve the problems caused to our beloved NHS by pension tax penalties on the most senior staff. Just trying to rely on such a change would leave the same problems and uncertainty that have undermined confidence in Senior Medical and nursing staff accepting extra shifts. Raising the threshold of earnings at which the TAA cliff-edge bites, from £110,000 to £150,000 adjusted earnings, will certainly not relieve the concerns that have caused an NHS staffing and operational crisis. The taper design leaves staff facing worrying uncertainty, especially in Defined Benefit schemes.
The taper rules should be abolished: The current rules are unreasonably complicated and unpredictable for a number of reasons. For example, the reduced Annual Allowance which triggers unexpected tax charges is based on current year’s earnings – and it does not use the actual monetary contributions paid into the pension scheme. The pension contribution is based on notional growth in the value of the final pension in future, so most non-pension experts would not know how much HMRC will assume they have ‘contributed’.
We want these people to be medical experts, not pension aficionados: The tax rules are so complex and the current years’ earnings are not yet known, so staff cannot precisely predict either of the variables that will determine whether they will receive a tax bill. They do not know their earnings until after the tax year ends and they will not know how much their estimated NHS Defined Benefits (DB) will be deemed to have grown. At the very least, they need reliable scheme information (and the NHS pension scheme administration has taken inordinately long time to send out statements) and ideally a financial adviser to assist.
The senior staff still won’t know in advance whether extra earnings from agreeing additional shifts and pension accrual might trigger a huge tax charge – and they cannot protect themselves.
Government needs to recognise the problems, before it can resolve them: If the Government believes just reducing the numbers actually impacted by the TAA pension tax will resolve the problem, they have not actually recognised what the problem is. As long as staff face the uncertainty which is inherent in the current taper allowance design, they will remain fearful of extra work. The same problems will persist in other pension schemes too.
Need to recognise sense of anger and betrayal: This proposal does not in any way recognise the sense of betrayal felt about the way the NHS pension matter has been handled. The TAA has effectively imposed a retrospective pay cut on the most valuable NHS staff who volunteered to do extra shifts to help their employer (you and me!) They were led to believe they were going to receive a generous workplace pension benefit, which is deferred pay, but it has been turned into a penalty of tens of thousands of pounds they had no warning they would face.
Scheme Pays is not a satisfactory remedy: It is true that those facing tax charges can ask their pension scheme to pay the Bill (although not in all cases) but the Scheme Pays option is still punitively expensive in their eyes because it amounts to borrowing the money from their future pension and being charged a high interest rate on that loan. So they still seem to feel the safest thing to do, especially if they do not have detailed financial advice, would be to avoid extra shifts just in case there is a problem.
This issue has been dragging on since at least 2018: As far back as 2018, local NHS Trusts were battling with this problem. A few have arranged information sessions to explain the situation to staff who may be affected, most have offered to pay employer pension contributions as current salary instead. Just as an example, in September 2018, in the absence of a national solution, Dorset NHS Trust felt they had to do something to address the operational concern of people reducing their working capacity and offered staff the option of leaving the scheme and receiving extra pay in lieu of pension contributions. But the scheme hasn’t had huge take-up by doctors, who are still reducing work hours because they do not want to give up valuable ill-health and life cover.
Government suggested two remedies last year and this is a third – they won’t work: The pension tax problems have continued to worsen over the past few years and it is time for radical action that addresses the underlying cause of the issue, rather than belatedly trying to tinker ‘flexibility of contributions’ or taper cliff-edge thresholds. The remedy also needs to get rid of the Tapered Annual Allowance as currently designed, as well as offering an apology to staff affected, recognition of the unintended damage, access to expert, reputable individual financial advisers to help with pensions, and reduce or eliminate the interest charged on Scheme Pays. These experienced and valuable NHS staff cost a fortune to replace and, in many cases, they are actually irreplaceable.
The sooner proper action is taken, the less the crisis will cost: Turning a staff benefit into a complex and potentially unavoidable cost has already caused damage to the NHS and impacted huge numbers of patients across the country. Indeed, the way the taper has operated has cost enormous sums to the NHS itself, with hospitals having to use temporary locum staff who are paid up to three times more than current employees and who are unfamiliar with the team’s and hospitals they have been brought in to. NHS productivity and efficiency are suffering and many people are unable to get the medical treatment they need.
An Alternative plan: 10-point blueprint for action
- Promise to ensure NHS pensions will continue to be a valuable benefit, not a punitive tax
- Acknowledge Government responsibility for the problem and apologise for the unintended consequences, to help restore staff trust and morale
- Commit to allowing staff to use Scheme Pays for ALL tax bills
- Remove or reduce the interest rate so Scheme Pays is not a high-cost loan
- Offer each NHS worker access to an IFA to work out their individual position
- Enshrine the promised tax amnesty for last year’s pension contribution into the rules so staff know they will face bills for doing extra work between now and April
- Redesign the tax rules to address the anomalies and uncertainties created by the TAA, so the most valuable staff are not driven away from both pensions and extra work
- Ensure that DB accruals are easier and fairer to compute when calculating the Annual Allowance – use actual contributions and in-year, not lifetime, additional pension
- Base income calculation on current year earnings, not past year
- Reform NHS pension arrangements to ensure senior staff are adequately rewarded.
NHS must acknowledge it has a duty of care to staff who feel betrayed: The pensions crisis has increased pressure on an already overstretched workforce, driving senior staff (which includes not just consultants, GPs and armed forces medics, but also nurses and dentists) away from taking on extra shifts. The Government says it is committed to ensuring ‘hard working staff who provide additional care for NHS patients do not find themselves considering reducing their work commitments, as a result of the interaction between their pay, their pension and the tax regime that surrounds this.’ All taxpayers have an interest in preserving the NHS and treating fairly those who dedicatedly work in it.