The trouble with pensions tax relief…
Pensions expert Jane Marshall considers the implications of the Government’s proposals for reform across the public sector and beyond.
It’s just too complicated and unpredictable, particularly if you are a member of a defined benefit pension scheme and your total earnings fluctuate year on year.
Given the intense media interest in our current pensions tax relief system and the effect this is purportedly having on NHS waiting lists, one would be forgiven for thinking this is an issue confined to the NHS. However, the impact is much more widespread than this. As a result of the media interest in the NHS position, there have now been widespread calls across the pensions industry for a review into the current pensions tax relief system, and particularly the tapered annual allowance, for all sectors.
The annual allowance, and particularly the tapering of the annual allowance for high earners, affects both public and private sectors alike. However, the private sector has much more flexibility in terms of how its structures the remuneration and pension benefits packages it offers to staff, which in turn can lessen the impact of the current pensions tax relief system.
For employees across the public sector (and not just within the NHS), there is relative inflexibility and a lack of choice in respect of how their remuneration and pension benefits packages are structured. In addition, increasing numbers of public sector employees are taking on additional work and responsibilities, often resulting in an increase to their total earnings and in some cases their pensionable pay, making it the ‘perfect storm’ in terms of being caught by the full force and effect of the tapered annual allowance. In addition, fluctuating pay makes it very difficult to calculate in advance if you will be subject to the tapered annual allowance and whether you will breach that annual allowance, leaving many with substantial unforeseen tax bills at the end of each scheme year.
So what does the Government propose to do about this?
At the moment the Government is only focused on the impact that the current pensions tax relief systems is having on the NHS, and seemingly the clinical staff within the NHS.
The Government’s first attempt at consultation was published on 23 July 2019. The consultation set out proposals to introduce a 50:50 option into the NHS Pension Scheme for clinicians. This would allow clinicians to halve their pension contributions in exchange for halving the rate of their pension growth, akin to what is currently available to members of the Local Government Pension Scheme. Almost immediately the proposals were criticised for not going far enough and for not tackling the issue of the unpredictability and complexity of the tapered annual allowance.
On 7 August 2019 the Government announced it was scrapping the 50:50 proposal and would shortly open a new consultation about a set of proposals which would give “senior clinicians full flexibility over the amount they put into their pension pots”. What this means is that clinicians could choose the percentage they wish to contribute (in 10% increments) in exchange for the corresponding percentage of pension accrual. For example, if paying 30% of the standard contribution rate the clinician would receive 30% of the pension accrual rate.
In addition, the announcement proposed that NHS employers be given the option to recycle any unused employer pension contribution back into the clinician’s salary. In other words the clinician would receive additional salary in lieu of the part of the employer pension contribution that would no longer be payable into the NHS Pension Scheme.
Alongside the proposals for flexibility in relation to NHS pension scheme benefits and salary in lieu of pension contributions, the Government announced that HM Treasury would review how the tapered annual allowance “supports the delivery of public services such as the NHS”. The statement goes on to provide that HM Treasury will continue to engage with the NHS, the British Medical Association and other stakeholders as part of this process. Is this a hint of the possibility of more widespread reform?
The Government’s announcement is very focused on the NHS, delivering patient care and reducing waiting times. These are all extremely laudable aims. But what about the extraordinary every day work that employees are doing across the public sector? Surely any solution for doctors should be rolled out to the police, fire service, teachers, local government etc. and not just those providing front line services?