Since early 2018, the BMA has been campaigning against the application of the annual allowance (AA) and in particular, the tapered annual allowance in the NHS pension scheme. Fundamentally, we believe that the annual allowance is unsuited to defined benefit scheme, such as the NHS.
In the NHS pension scheme, members are unable to control their pension growth – how much your pension grows each year is directly related to your pensionable earnings and the amount of time you are a scheme member. In addition, the calculations are exceedingly complicated, something that is exacerbated by a large number of doctors now being a member of 2 pension schemes.
This is clearly a significant problem, but it was the unintended effects of the tapered annual allowance that really caused a major issue for doctors and the NHS. This led to the perverse situation that the many doctors found themselves either earning less or receiving a lower pension if they did more work for the NHS. This understandably led to large number of doctors being left with no option but to reduce the amount of work they did.
Indeed even before the COVID-19 pandemic hit, this issue contributed to the worst waiting list performance since records began.
The BMA had been calling for the annual allowance to be scrapped in public sector defined benefit schemes, a solution supported by the governments own advisors, the Office for Tax Simplification.
Following extensive BMA lobbying, in March 2020, the chancellor did make significant changes to the tapered annual allowance rules. These changes were:
- The income threshold has been increased to £200,000 (from £110,000)
- The adjusted income has been increased to £240,000 (from £150,000)
- The standard annual allowance has remained at £40,000
- The minimum annual allowance was decreased from £10,000 to £4,000. (Need to have an adjusted income of over £300,000 to have an annual allowance that is lower than at present and an adjusted income of £312,000 to be fully tapered).
What the changes mean
Although, it has fallen short of the BMA’s primary ask of scrapping the taper in public sector defined benefit schemes, the changes announced at the budget are significant for members.
The key difference is the rise in the threshold income to £200,000. At this level of threshold income, the vast majority of doctors (except for the very highest earners) will no longer be affected by the taper. These members will therefore retain the standard annual allowance of £40,000. It is also important to remember that the threshold income does not include your employee pension contributions.
The most important consequence of this change is that provided you are not tapered, the situation whereby in effect you earn less or receive a lower pension by doing more work, has been removed. There are some caveats to this however in that if you are still tapered then this situation can still apply. There are still also issues when there any pension growth due to a temporary rise in pensionable pay.
In addition, the HMRC rules you can carry forward any unused annual allowance from the 3 previous tax years. One of the knock-on effects of the taper was that due to the reduced annual allowance, many doctors used their full available AA each year and therefore had nothing left to carry forward.
With the majority of doctors now retaining the standard AA of £40,000, the ability to carry forward some unused AA is increased. This could mitigate or even completely remove the impact of a rise in pensionable pay such as a pay increment.
However, for a small number of members the changes may leave them worse off as the minimum level to which the annual allowance can taper down has reduced from £10,000 to £4,000 from April 2020. This reduction will affect individuals with adjusted income (including pension growth) over £300,000 if they also exceed the threshold income level.
The Government confirmed that the lifetime allowance, will increase in line with CPI for 2020-21, rising to £1,073,100.
Despite this announcement, there are still a number of issues that result with the application of pension taxation to the NHS pensions scheme, and the interaction between the reformed and legacy scheme.
The BMA is therefore continuing to highlight and campaign on behalf of members to mitigate the ongoing issues outlined below:
- The BMA remains firmly of the view that the annual allowance is unsuited to defined benefit pensions schemes such as the NHS. Many doctors with incomes below the new threshold income will face tax bills as a result of exceeding the standard annual allowance which remains at £40,000 - this can happen following a modest rise in pensionable pay. As outlined above they have no control of their pension growth so there is little they can do to prevent this.
- The issue of ‘pseudo-growth’ remains a concern for the BMA. ‘Pseudo-growth’ occurs when there is a temporary rise in pensionable pay. This temporary pay rise can cause large in-year pension growth in your legacy pension scheme (1995/2008). This can result in a significant annual allowance tax liability. However, if your pay falls again pre-retirement, because of the way your pension is calculated, you may not receive the increased benefit on which you have paid AA tax. This is extremely unfair.
- The complexity of NHS pensions continues to make it difficult for our members to understand their financial situation. Many accountants, financial advisors and specialist pension firms are unable to calculate this accurately. Indeed, HMRC developed a tool to calculate your available annual allowance which was initially wrong and needed to be taken down. More recently, NHS Employers and First Actuarial, the NHS pension scheme actuaries released a ready reckoner to determine whether you are at risk of an AA charge. The BMA highlighted a serious error with the tool which could have underestimated AA tax by £16,000. Whilst this has been rectified, this tool does not accurately calculate pension growth for those with legacy scheme (1995/2008) membership. Given that the majority of scheme members have some legacy scheme membership, we advise you not to rely on this tool and instead use the BMA Goldstone modeller and seek independent financial advice.
- GPs have not been able to access to their pension information in a timely manner. Indeed, many GPs have records that are several years out of date. For secondary care doctors, who need to calculate their AA tax bill, the pensions savings information has been delayed as well and the BMA has been lobbying for this information to be available in a timely manner for all members.
- There has been no change to the lifetime allowance and many doctors will still need to consider taking early retirement as a result of this. The BMA has emphasised that it is essential that there is full mandated recycling of the employer’s pension contributions and a re-provisioning of death in service and ill-health retirement benefits for those advised to leave the scheme because of pensions taxation.
- There are no late retirement factors in the 1995 pension scheme, and you are not able to draw your 1995 pension whilst contributing to the 2015 scheme. This means that those who are members of both the 1995 and 2015 are unable to benefit from the full value of their pension.
- The level of the threshold and adjusted income levels are fixed rather than linked to inflation. We need to address this as otherwise the number of people affected by the taper will rise each year.
- The annual allowance and lifetime allowance are supposed to tools to limit the rate of tax relief. However, in a career averaged revalued earnings pension scheme such as 2015 and the GP pension schemes, doctors do not benefit from higher rate tax relief in the first place due to the tiered pension contribution rates. At the highest tier (14.5%) this more than offsets the benefit of higher rate tax relief. A further anomaly with this tiering is the unfair way in which those working part time or sessional GPs have their contribution tier calculated. This can result in part time workers and sessional GPs paying significantly more for the same amount of pension as a full-time colleague even if their actual pensionable pay is the same.
- Although for scheme members, it seems that you have a single pension - the reformed and legacy schemes are treated as separate schemes by HMRC. This means that even though one scheme may have negative growth, this is rounded up to £0 and not offset against positive growth in the alternative scheme. This contributes to the issue that those who are members of both the reformed and legacy schemes pay more in annual allowance tax that those who were protected members in the legacy scheme. Given that this protection has been deemed unlawful on the grounds of age discrimination, this is a point we have taken forward in the government’s consultation on their proposed remedy.