Why are Pensions ruining the NHS?

Over the years since 2006 and Pension Simplification, pensions have become more complex. The big problem is that there is a conflict between the desire to encourage people to provide for their retirement and the impact of tax legislation both on the nation’s coffers and on society and the concept of fairness. In the case of employees of the State, there is the added factor of what their remuneration should be, paid for as it is by taxpayers in general.

To be honest, this provides all the ingredients for a total mess and the likelihood of there being a right answer or pleasing everybody is miniscule.

Employees of the State have historically seen there to be a covenant between them and the State when it comes to how they are rewarded. In return for lower earnings than they could get in the private sector, the State would look after them in the longer term through provision of guaranteed retirement benefits, the Superannuation scheme.

However, as defined benefit schemes have disappeared from the private sector, there has been an increasing gulf between those who still have access to these in the public sector and those who see themselves as paying for that privilege. Looking at the recent press on the potential problems which the University Superannuation Scheme (USS) may have, it is clear that this gulf will continue to widen. This makes that covenant between State and State employee increasingly important.

Meanwhile, the need to raise tax revenues, avoid giving away too much in tax reliefs and introduce greater fairness in the tax system, or give the appearance of doing so, has produced a series of changes to the level of tax reliefs provided by pensions. So alongside the Lifetime Allowance (LTA) and the Annual Allowance (AA) we now have the Tapered Annual Allowance (TAA).

Once your taxable earnings from all sources exceed £110,000 you may become liable to a lower AA than normal, calculated via a tapering exercise. A second calculation takes taxable earnings and adds on employer pension contributions, to be tested against a £150,000 limit. If the result exceeds £150,000 then your AA is reduced and you are allowed a TAA with a minimum of £10,000 for the year. If your pension accrual exceeds this TAA, you pay tax on the excess at your highest rate of income tax.

The aim of this is to restrict tax relief on pension contributions for higher earners but to avoid a cliff edge in the removal of that relief. However, the law of unintended consequences is a hard one to avoid and the impact on the NHS in particular has been huge, with the tax regime hitting consultants in such a way that many are reducing the hours they work.

Although there are too many factors to comment on here, the biggest issue arises because of a combination of two factors :

• Increases in the benefits provided by the NHS pension scheme can produce very high values for AA purposes - this in itself is reasonable as it is a very valuable benefit;

• Historically doctors have done overtime and additional sessions almost as a matter of course, without which the NHS would struggle to staff itself properly.

For example, a consultant who receives an increase in their basic salary for their contracted sessions is then asked to work some additional sessions to meet oncology targets. The basic salary increase is pensionable and so they see a jump in their pension benefits and a potentially high value in AA terms. The additional hours are non-pensionable but take their total taxable earnings to £111,000. That additional £1,000 will under normal income tax rules have an effective tax rate of 60%, because of the reduction in Personal Allowance, and be subject to 2% National Insurance. So the consultant would expect to only take home £338 of it.

However, if that additional income also takes them over the £150,000 when including the pension benefit increase in the second calculation, the additional tax charge could well be more than the £338 which they would have left after income tax and National Insurance. Potentially thousands of pounds more. Effectively that doctor will be paying for the privilege of working extra hours and will not even have the benefit of a larger pension at retirement because those hours are non-pensionable.

The situation is, as you would expect, far more complicated than this in pension terms, income terms and societal terms. This is also not an issue solely for the NHS however, it has impacted most noticeably on the NHS. This is partly because of technical elements of the NHS scheme and lack of flexibility and partly because of the extended covenant which sees the NHS continue to run because those who work in it accept that they will need to work more than their contracted hours.

Whether you believe the intention of the system is right or not, as this issue has grown over the last year what we are seeing develop is a crisis in staffing in the NHS, amongst senior medical staff in particular. Doctors are turning down overtime and additional sessions out of fear of penal tax bills and many are considering retirement. So if your next consultant appointment gets cancelled, what may be finally bringing the NHS to its knees may not be increasing longevity or obesity but the unintended consequences of pension reform.

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