The issue of doctor’s pensions continues, with some finding they’re penalised for working overtime. Given the pressures the NHS already faces with understaffing, a solution is quickly needed. A solution needs to allow professionals to continue providing critical support to the healthcare system without them losing out financially.

Ministers have recently unveiled a major overhaul of the NHS pension scheme but what are the options?

What is the issue with doctor’s pensions?

Some doctors and other NHS professionals have found they’ve faced additional, unexpected bills when their income and pension contributions have increased, including when taking on extra shifts, benefiting from an annual incremental pay step, or career progression. This can be caused by breaching annual and lifetime allowances for pension contributions.

Understanding whether additional work or pay will breach these thresholds beforehand can be challenging. This is due to pension growth being calculated from a formula linked to pensionable salary rather than the amount on a payslip. As a result, some professionals have become cautious in taking on additional work or even choosing to leave the profession.

According to a British Medical Association survey, thousands of NHS staff reduced their working hours due to the pension tax rules. More than four in ten (42%) GPs were found to have reduced the number of hours spent caring for patients because of concerns around pension taxation. A further 34% were planning to reduce their hours.

Dr Richard Vautrey, chair of the BMA GP committee, said: “These results show the extent to which GPs are being forced to reduce their hours or indeed leave the profession altogether because of pension taxes. With patient lists growing and the numbers of GPs falling, swift and decisive action is needed from the Government to end this shambolic situation and to limit the damage that a punitive pensions taxation system is inflicting on doctors, their patients and across the NHS as a whole.”

The figures were similar for hospital consultants too; 30% had already reduced hours and 40% planned to.

Whilst it may be tempting to leave your pension if you may face additional tax, this may not be the best option for you. The auxiliary benefits, for example, maybe valuable for your circumstances.

Overhauling the NHS pension scheme

Recently the Department of Health and Social Care began consulting on a new set of proposals to offer senior clinicians more control over their pension growth. The consultation will run until 1 November 2019. So, what measures are currently being consulted on and what are the other alternatives?

1. 50:50 flexibility

This is a solution that was previously proposed but has now been withdrawn. The 50:50 flexibility would have allowed NHS professionals to reduce both their pension contributions and pension accrual by 50%. As a result, scheme members would have been able to manage pension growth if it looks likely to exceed thresholds.

However, early responses suggest this proposal doesn’t provide sufficient flexibility for individuals to manage pay, pension growth and tax liability. As a result, whilst the initial responses from this consultation are still being considered, it has been withdrawn in favour of the option outlined below.

2. Flexible accrual rate

This proposal was originally put forward in July and is part of the current consultation.

It would allow pension members a flexible accrual rate in 10% increments. This means pension holders will be able to more effectively manage both annual and lifetime allowance liability. The ability to reduce the accrual rate, for instance, can mean timing reaching the lifetime allowance with the point of planned retirement to maximise pension benefits with careful planning.

Under the proposals, members would be able to choose an accrual level at the start of each scheme year, adjusting it to suit different points in their life and career.

3. Fine-tuning pension growth

This proposal has been put forward alongside the flexible accrual rate outlined above and complements it.

It would allow the accrual rate to be updated towards the end of the tax year once members have an idea of their total earnings to reduce the risk of exceeding allowances. As a result, members may select a lower accrual rate initially and then increase this at the later point to maximise allowance or vice versa.

4. Removing the tapered allowance

Finally, removing the tapered allowance could also help ease the pension crisis. However, whilst there is an argument for doing this, it has not been proposed by the government.

Pension contributions benefit from tax relief and the tapered allowance seeks to limit the amount of pension savings that can benefit from this. It was introduced in 2016 and may reduce your annual allowance.

Individuals that have a net income that exceeds £110,000 or adjusted income (net income plus annual pension income) exceeds £150,000, will have a lower annual allowance. For every £2 earned over the threshold, the annual allowance is reduced by £1, with a minimum annual allowance of £10,000. This can create some cliff edges depending on circumstances.

Seeking financial advice

No matter the outcome of the consultation, it’s important to understand your pension and potential tax liability. This is where seeking financial advice can help. Under both the current NHS pensions rules it’s crucial you understand how additional income could lead to further tax. If the flexible accrual rate proposal moves forward, you’ll need to think about which level is right for you and your retirement plans.

Working with a financial adviser can give you confidence in your pension provisions. If you have any questions relating to your NHS pension, please contact us.