13 Sep NHS Pensions
It appears that finally the government has listened and is reviewing the pension Taper Annual Allowance (TAA) for NHS workers and potentially for other public sector employees.
The TAA was introduced by the government in 2016 and created further complexity by trying to reduce the ability for ‘high earners’ to claim tax relief by making pension contributions.
The TAA restricts the pension annual allowance for people with deemed earnings over £150,000 by reducing their standard annual allowance by £1 or every £2 of ‘earnings’ over this threshold. Since the £150,000 deemed earnings include employer contributions to pension schemes, this creates an impossible position for some employees who are members of defined benefit pension schemes. The deemed level of pension contributions for these types of schemes is the increase in scheme benefits over the tax year adjusted for inflation, which the member has no control over, and is linked to their service and total earnings at the beginning and end of the tax year.
If you are in the NHS scheme, or other similar schemes, and receive a pay rise or work extra hours which increase your earnings, you will pay tax on those additional earnings at your marginal rate of income tax. However, your deemed benefits in the pension scheme will also increase due to your level of service applying to your new higher salary. This, when added to your other earnings, could lead to a TAA tax charge. This additional tax charge could be substantial and, in some cases, would have to be paid from your net income or savings.
You can find full details of the annual allowance and TAA, in our Guide to Pensions which is free to download at – http://www.bloomsburywealth.co.uk/guide-to-pensions/
In defined benefit schemes such as the NHS pension scheme and other public sector schemes, there is the possibility that this could create a disincentive to work. In some cases, this is made even worse by the historic protections in place when a lot of these schemes transferred to career average salary-based schemes. Members of the previous schemes maintained their service in the old schemes linked to their current salary (not the pensionable salary when the old scheme ceased), while also accruing benefits in the new scheme. Compared to many private sector workers in money purchase pensions, these types of schemes and the protection granted are enviable, but due to the inability to alter contributions or affect the deemed increase in benefits without leaving the scheme they can create punitive tax charges.
In some extreme cases, the additional TAA tax charges could result in marginal tax rates up to 100% of any additional earnings. This led, for example, to NHS consultants and other high-earning clinical staff reducing their hours or choosing not to carry out any additional work because doing so resulted in higher pension-related tax charges. This doesn’t help with NHS staff shortages or waiting lists.
Following lobbying from the British Medical Association ‘BMA’, the government has decided to review the operation of the TAA. It is considering bringing in the ability for NHS (and hopefully other public sector) workers to decide each scheme year what level of membership applies to that year and in doing so reduce the level of member contributions and deemed accrual in the scheme for TAA calculations.
This is welcome news as the TAA in its present form has some unintended consequences. Although it reduces the tax relief available, it is also creating a disincentive to work, especially additional shifts and hours. It is also encouraging some public sector workers to leave or consider leaving their employer’s pension schemes prematurely and losing valuable long term benefits in the process.
There are some disadvantages to any changes made in that we will end up with further complexity rather than reducing it. You may recall that when pension legalisation was first overhauled in 2006, it was billed as ‘pension simplification’, however the reality since has not achieved this. The proposed changes are hardly likely to make pensions for public sector workers simpler.
The changes currently under consideration don’t appear to be able to be applied to private sector workers in similar defined benefit schemes who may have the same issues, but at least it is a step in the right direction for members of the NHS pension scheme.