New Model Adviser - For professional financial planners

Register free for our breaking news email alerts with analysis and cutting edge commentary from our award winning team. Registration only takes a minute.

Scrapping lifetime allowance would be good medicine

With the lower limit piling yet more pressure on hard-pressed hospital staff, the chancellor may look at ways to overhaul pension tax treatment

Scrapping lifetime allowance would be good medicine

I have barely made it through the first month of 2019 before breaking my first New Year’s resolution. While some are attempting to get through the first 31 days of the year without a drop of booze, or are pounding out miles on a treadmill, I was planning to avoid any discussion about pensions tax relief.

Sadly, health secretary Matt Hancock (pictured) has forced me to break this pledge. Last week, Hancock decided to take a break from buying Brexit fridges to tell trade magazine Pulse he is lobbying chancellor Phillip Hammond to ease the strain on NHS staff caused by the lifetime allowance.

‘The biggest concern I have raised is around the tax treatment of pensions,’ Hancock said.

‘Of course tax is a matter for Treasury, but I have had conversations with the chancellor about looking at the details of tax treatment of pensions, because I understand the impact it has.’

A drastic change

Hancock refused to identify whether the solution (or solutions) being discussed would be specific to GPs or apply to all savers.

Given many senior civil servants within the Treasury itself have been affected by cuts in the lifetime allowance, it seems inconceivable policymakers would not be prepared for a backlash from high-earning public sector defined benefit (DB) members.

Following generous reforms introduced in 2015, the NHS pension scheme is a career average revalued earnings scheme with 1.9% accruals. The halving of the lifetime limit from £1.8 million in 2010 to £1.03 million today, has caught out senior staff, who probably do not view themselves as super-rich.

Even with a ludicrously generous 20x multiplier, which effectively means DB members get double the lifetime allowance of their defined contribution (DC) counterparts, professionals are still breaching the limit.

As things stand, the choices available to these members are pretty unpalatable. They can stay in the scheme and face paying thousands of pounds in tax; quit the scheme altogether; stop working; or drastically cut back their hours to reduce their average salary.

Given the resource pressures on the NHS at the moment – ironically partly as a result of the ageing population pensions are designed to support – it is hardly surprising Hancock is challenging Hammond on this issue.

Government solutions

The chancellor has a number of options to earn some goodwill from the medical community and other high earners in the public sector.

The most obvious solution would be to scrap the lifetime allowance altogether. This would not only solve the problem faced by DB members, but also rid the pensions system of one of its most complicated and unfair features. The annual allowance provides a much simpler lever to control tax relief costs, if the chancellor deems this necessary.

Alternatively, Hammond could hike the lifetime allowance to give higher earners some breathing room, perhaps lifting the ceiling back to £1.8 million – the figure deemed acceptable by the government in 2010.

However, the policy trajectory regarding retirement savings incentives has been going relentlessly downwards in the past 10 years.

One simple, albeit highly risky and unpopular solution, is reducing the value of the pensions public sector workers receive. This could be anything from reducing accruals, to abandoning DB altogether in favour of DC, an idea Theresa May once supported before her ascension to beleaguered prime minister. It is worth noting this would not help those already close to or over the existing lifetime allowance.

The NHS crisis could possibly provide a window of opportunity to rethink the lifetime allowance, but it seems highly unlikely the Treasury will increase net spending on retirement savings incentives. Any handouts designed to help doctors will likely be matched by cuts elsewhere.

Tom Selby is a senior analyst at AJ Bell

Share this story

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.
More Content
7471.75 -51 0.68% 04:35
More Content
More Content


Tax Doctor: Adviser solves cross-border tax confusion

Tax Doctor: Adviser solves cross-border tax confusion

John’s specialist cross-border adviser mitigates between his UK and Australian finances to maximise tax efficiency and structure his planning for retirement