NHS Pension & Tax; ‘Should I Stay Or Should I Go’

A blog to (hopefully) give you some clarity on a very confusing topic!

There are many articles circulating at the moment, doctors are talking more about pensions than they are about surgery, doctors are really starting to get worried about their NHS pension and a potential tax bill.

So I thought I would try and give you some clarity on a very confusing topic. In this blog, I will give you the headline points, which I hope will help you understand how the current situation has presented itself, what the current state of play is and what you need to consider going forward.

The pension background

The government want people to save for their retirement.

The government do not want people relying on the state in retirement.

So the government encourages people to save into a pension, though tax relief. i.e. your contribution will receive tax relief at your highest rate of tax.

There are limits on how much you can contribute into a pension and obtain tax relief from the government. It is 100% of your earnings up to the annual allowance of £40,000

In 2010/2011 the annual allowance was £255,000.

In 2011/2012 it dropped to £50,000

In 2014/2015 it dropped to £40,000

It costs the government and treasury a large amount of money to provide this incentive. In 2016 the cost increased by £1 billion. The forecast stood to cost the government £41billion in 2017/2018.

The government wants to recoup some of these costs and make the system ‘fairer’. By recouping these costs it can then put further money in to other areas such as the NHS.

In 2016 the tapered annual allowance was introduced. This means those with ‘threshold earnings’ over £110,000 and ‘adjusted earnings’ over £150,000 will have their allowance reduced by £1 for every £2 earned over £150,000, up to a maximum reduction of £30,000. If you exceed your allowance you will be taxed on the excess.

The lifetime allowance (LTA) was introduced in 2006. It is the amount that you can take from your pension without incurring additional tax charges. The LTA was £1.8m in 2011/2012 it then dwindled down to £1m in 2016/2017. It now increases each year in line with the consumer price index.

The NHS pension – the gold plated pension

The NHS pension is a public funded pension. The pension was known as the gold plated pension because you will be given a guaranteed income in retirement, inflation proofed for the rest of your life. If you die your spouse and children will also receive a pension and if in active service a lump sum death benefit.

Not many people have this type of pension. Most people actively save into a workplace / private pension where their money is invested and there is no guarantee on the amount that they receive at retirement.

The NHS contributes about 20% of your salary into your NHS pension. You contribute up to 14.5% of your earnings into your NHS pension.

In the private sector, the minimum an employer can contribute into a pension is 3%. On average, contributions are about 7% (good schemes are about 14%).

We have a problem!

Because of the decent NHS pension, the way final salary pensions are calculated for annual allowance and lifetime allowance purposes, doctors working hard and taking on extra cases, receiving a merit award etc, we are seeing doctors get clobbered by the annual allowance tax charge and potentially in the future the lifetime allowance tax charge. 

What should doctors do? (Very good question)!

–           Opt out of the NHS pension? Well yes you could but why, you won’t receive the 20% contribution from the NHS and the money you were putting into the pension will now be paid as income therefore taxed at your highest rate. You also won’t have the death in service death benefit.

–           Work less, therefore ‘save’ less into a pension. This can help on annual allowance purposes, however if you are a member or a deferred member of the 1995 / 2008 pension and near retirement age then it could lower your pension income at retirement.

–           Carry on and pay the tax bill. But not many people have the disposable income to pay the tax bill.

–           Defer the tax bill. Well actually more like a loan of circa 4.8% from the government and it will affect your final pension income at retirement (but will help from a LTA perspective).

•  Retire. Why not if you can afford to!

•  Leave the NHS and set up privately. Will you earn enough privately?

Doctors are doing all of the above.

1 in 10 doctors plan to quit early

Thousands are cutting hours to escape breaching the tax bill.

Waiting lists are rising

Government you have a big problem! – Call to action

The sliver of light in the cloud is that the government has launched proposals to make pensions more flexible for senior clinicians delivering frontline care.

A proposal known as a 50:50 option would allow clinicians to halve their pension contributions in exchange for halving the rate of pension growth.

Experts in the industry have different views;

Baroness Altmann said the problem lies in how the Treasury has tried to apply the taper rules in the same way to final salary pensions as to defined contribution schemes, for which the calculations are easier.

“It was a hurried measure and should either be scrapped entirely with the Treasury weathering the bill, or just drop it for those with defined benefit schemes,” she said.

Sir Steve Webb former pensions minister said that although a flat £30,000 annual allowance would be “far cleaner and simpler than a £40,000 allowance plus a taper, there would be gainers and losers from such a change, including among higher earning NHS staff”.

Mr Hammond told MPs on the Treasury committee last month that limits on how much savers can put into their pensions – including a lifetime allowance of £1.05m – were “effective”, because they ensured “those on the highest income bore more of a burden than those on lower incomes”.

“My predecessor, [George Osborne] was clear that his intention was to ensure those on the highest income bore more of a burden than those on lower incomes. It is surprisingly difficult to find ways to give effect to that in the tax system”, he said.

What to do

There is certainly no one size that fits all, what you should do will depend on your individual situation and circumstances. I do however think that rather than getting yourself worried and worked up by it, it is time to assess your situation;

Have a look at your NHS total reward statement – how much have you accrued in your pension to date

Check what other pension benefits you have. What is the value of them?

Have a look at your NHS annual allowance pension statement. Have you exceeded the annual allowance? Or are you close to exceeding the annual allowance?

Check how much you have contributed into other pensions in the same tax year.

This will give you a clear idea of where you are now. From here I would suggest if you think you have a problem or will have a problem then it is time to speak to an accountant and or financial advisers who specialise in this area. With them you can do some cash flow planning and ‘what if’ scenarios to see what the tax bill could be, when it will occur, how to pay it and what can be done to mitigate it. In doing so, giving you a bit of peace of mind and reassurance on how you can continue to grow your wealth, retire when you want to and not be clobbered by an unexpected tax bill.