Doctors' pensions are on life support: here's how to fix the mess

As the British Medical Association convenes meetings to address doctors' concerns over the impact of working hours on their pensions, adviser and NHS pension expert Rachael Hall steps forward with solutions.

Our senior NHS and ancillary health care professionals are now reacting to the pension system in a way which affects all of us. Anyone reliant upon primary care services, elective surgery or those waiting for cancer treatment is now being hit by counter-intuitive pension rules concerning the annual allowance taper. Here are two case studies...

 

Our senior NHS and ancillary health care professionals are now reacting to the pension system in a way which affects all of us. Anyone reliant upon primary care services, elective surgery or those waiting for cancer treatment is now being hit by counter-intuitive pension rules concerning the annual allowance taper. Here are two case studies...

 

The young GP

Most doctors are clinicians and have little interest in running a business, but the NHS needs staff with entrepreneurial minds to inspire the next generation of leaders. My client is only seven years into his career, but his pension is now subject to the full annual allowance taper. We estimate that if he stays in the scheme until his state pension age then he can look forward to a pension of minus £1,050 at retirement. With the 'scheme pays' interest charged at a much higher accrual rate than the revaluation of his pension, over the long term, the overall costs are likely to outweigh the benefits, when subject to immediate tapering so early on in his career.

The surgeon 

With pensionable pay in the late eighties, surgeons' average pension input amount has been running at £29,000, well within the standard £40,000 annual allowance, that is until the 2016/17 tax year, when the taper was introduced. Fast forward to April 2019, and my client has used up all carry forward allowances, because her non-pensionable earnings are causing tapered annual allowance charges. If she stays in the scheme from now until retirement, she is likely to lose £30,000 annual pension in scheme pays reductions.

So what do we do?

There have been many suggestions put forward by pension experts, all of which tend to result in a lower accrual rate. Just look at the 'hokey cokey' method, which is a do-it-yourself way of coming in and out of the scheme periodically to lower the growth rate, in the hope that it will reduce or completely mitigate the annual allowance charge. However, this can be disastrous if badly planned and could result in a much lower pension than using scheme pays. 

The Local Government Pension Scheme offers a more structured version of 'hokey cokey' called the 50:50 account, which halves the accrual and contribution on the scheme. But reducing a pension contribution by 50% is certainly not a good idea for anyone near the threshold Income level (£110,000) as member contributions are used in the calculation as a deduction. Therefore, we want this value to remain high. This scheme is more likely to appeal to those on the opposite ends of the spectrum: those on lowest and very highest of incomes.

In addition, I would pose the follow questions and solutions...

Unused Allowances

Unused allowances have been set up on a 'use or lose' basis, as they expire every three years. This should be reversed and allow retrospective negative pension input amounts to be carried forward indefinitely, as many people have already used up their allowances and are subject to AA charges every year.

Throughout their lifetime a consultant will have pay increases and likely promotions, so the threat of an annual allowance charge remains ever-present and risks stalling the productivity of a workforce through fear of unintended consequences. 

Enhanced Opt Out

Offering this with the return of the employer’s pension contribution (at 20.6%) may go some way to compensate those who have no unused allowance left.   

Flexible remuneration

Working within the current structure to a maximum of 10 programmed activities, it should be the employee’s decision as to how many sessions they want to superannuate, along with responsibility payments, on call supplements and clinical excellence awards.

The income multiplier (16x)

Is this fair value if scheme pays deductions and negative revaluations can apply, thus reducing the 'defined benefit'? 

Scheme pays guarantee

A 'guarantee' should be given to every DB member that scheme pays will never represent more than a set percentage of the standard pension at retirement.

 

Scrap the Taper

It does not make any sense why the NHS pension scheme should be liable to pay a tax liability derived from non-pensionable and non-NHS income sources. If the Treasury is adamant this taxation is to remain then the following changes should be implemented immediately:

  • Additional AA tax charges should not apply to anyone who has a pension input amount within the standard £40,000 allowance, and;
  • Everyone should have a standard build up rate, so it does not disincentivise job opportunities.   

Threshold Income & Adjusted Income

These should be linked to pensionable pay (not gross income) and inflation linked. 

In addition, I would like to see the NHS total rewards system updated to include a full membership history broken down into the relevant pension input periods, all month 12 payslips for the current and last six years, and a historic record of all pension input amounts since 2011/12.

Rachael Hall is an NHS pension specialist IFA at Circle Financial Services

                                                 

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