Doctors suffering from pension tax ailments should consider seeking financial advice rather than self-treating symptoms, writes Moira Warner, as she considers various ways to deal with the NHS pensions conundrum.
There's been a good deal of commentary on the maladies affecting NHS pensions of late ranging from administrative delays to data collection. But it's the impact of the tapered annual allowance on doctors which has attracted the most attention because it's driving behaviours which are detrimental to the effective operation of frontline services. It's in no one's interests if doctors are leaving service or declining crucial additional shift work. So something needs to give.
Abandoning the tapered annual allowance altogether would cure this pension malady for higher earners across the public and private sectors. But given government has confirmed that there will be no special tax favours for doctors and the taper is to stay for now, alternative potential treatments need consideration.
A number of Trusts are now reportedly offering cash top-up payments in lieu of employer pension contributions. While undoubtedly a step forward, this option does come with potential side-effects for the calculation of any final salary benefits and ill-health or family benefits should the worst happen. And of course the payment is taxable.
Pay less, get less
The British Medical Association has called for a pay less to get less arrangement such as the 50/50 option currently available under the Local Government Pension Scheme (LGPS). Members in this section of the LGPS pay a half contribution to accrue half the pension benefit for the year but retain the right to death in service benefits calculated as for full members.
While this option reduces pension input, perversely it may also result in higher threshold income as the latter excludes pension contributions. The overall advantage is therefore not always as compelling as members may imagine. This doesn't mean that there isn't a place for a "pay less to get less" option as advantages extend to the wider membership. More modestly paid nurses are also leaving the NHS pension scheme due to affordability issues. The lower contributions associated with a 50/50 style option might allow these leavers to remain in the scheme and continue to secure generous employer contributions - albeit at a reduced rate.
Continuing active membership also brings with it certain other advantages such as retention of the right to have earlier final salary benefits calculated using later (potentially higher) salaries earned under the career average scheme.
Making overtime payments pensionable
Horror stories have emerged of eye-watering tax rates on additional overtime pay which causes the £110,000 threshold income cutover to be exceeded. Making doctors' overtime payments pensionable could reduce these marginal rates with the result that additional shift work represented better value to members.
Following the judgement handed down by the High Court in March in relation to the Welsh Firefighters' pension scheme, there may be an expectation that doctors' overtime should already be pensionable. But caution is needed. The key issue tested by the Welsh firefighters was whether the overtime was pensionable because it was "regular". NHS pension scheme rules similarly include "regular payments" under the definition of pensionable pay but exclude "payments for overtime". While clarity on what comprises "regular payments" is undoubtedly needed, any read-across from the firefighters' case is dangerous as the overtime would need to be proven as "regular". Contraindications for this treatment include the potentially significant cost implications for the scheme.
Defined contribution (DC) alternative
Regardless of the amount of adjusted income, NHS members affected by the taper still have a minimum annual allowance of £10,000 and it makes sense that this is maximised. But there's no employer contribution to a personal pension. As an alternative to its DB scheme, the Civil Service now operates an alternative DC arrangement called the Partnership Pension Account. Employer contributions to this remain generous compared to those typically paid in the private sector. Members are permitted to switch between their applicable DB scheme and this DC alternative once a year facilitating both retention of the employer contribution and pro-active member management of occasional annual allowance issues.
Under a similar arrangement for the NHS, provisions for a variable cap on employer contributions could give members certainty that their individual tapered annual allowance wouldn't be breached. This treatment has the advantage of being likely to reduce employer costs and taxpayer liability and may be popular with members keen to access pension freedom options.
The Universities Superannuation Scheme (USS) has put in place a number of scheme options with pension tax issues for their higher earners in mind and there's nothing to stop NHS stakeholders similarly agreeing tailored solutions which fall within cost tolerances. The USS options variously allow members to set a voluntary cap on the proportion of their pay which is pensionable, or to cease accruing retirement benefits altogether, in either case retaining the right to "full" death in service and ill health benefits. The process of amending public service pension scheme regulations is cumbersome so acceptable alternatives should be considered before any treatment plan is put in place.
Communications and Data
Any scheme options designed to legitimately allow doctors to mitigate pension tax charges will only succeed to the extent that affected members are able to assess the value of those options against their personal circumstances. Without accurate information and tools, there's a risk poorly informed choices will be made.
With that in mind, employers who are failing to provide timely, accurate data need to up their game so that annual benefit statements become reliable. It's inconceivable that members and their advisers are sometimes reliant on information which is partially constructed by NHS Pensions. Better-informed choices about continuing active membership would also be made if the scheme provided estimates of career average benefits at retirement or else provided the tools for members to estimate this themselves.
Back in 2011 the Independent Public Service Pensions Commission recommended that pensions should continue to be an important element of remuneration and that employers should take greater account of them "when constructing remuneration packages and designing workforce strategies". Employers are failing to live up to that aspiration if pensions tax issues are driving doctors to leave service, leave aside overtime or leave the country.
While doctors wouldn't be alone in rejoicing if the tapered annual allowance were abandoned, it doesn't look likely at the present time. Alternatives need urgent consideration. In the meantime, doctors suffering from pension tax ailments should consider seeking professional financial advice rather than self-treating symptoms.
Moira Warner is senior business development manager at Royal London.
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