After months of uncertainty, the government has confirmed emergency measures relating to the NHS pension crisis. The pension Annual Allowance has led to some professionals facing additional tax charges when taking on additional work. In the short term, the government will cover the bills of those affected.
What has caused the NHS pension crisis?
For high-earners changes to the NHS pension scheme has made it less attractive.
The Annual Allowance means those with an income exceeding £150,000 can face additional tax charges. As a result, some professionals are finding that taking on overtime work, incremental pay steps or career progression are costing them money. At a time when the NHS is stretched, having members of staff that are reluctant to work overtime is placing pressure on resources.
This is one of the key reasons why NHS pension members are choosing to opt-out. Previous research has indicated that around 16% of NHS workers have opted out of the pension scheme in the last three years. Compared to similar public pension funds, this is a significant portion. Just 1.45% of those eligible for the Civil Service Pension Scheme opt-out, for example.
To avoid paying the tax charges now, members can already use a ‘scheme pays’ option for an Annual Allowance charge. This creates a notional account which suffers interest, charged at the rate of inflation plus 2.4% per annum. Over the years, this can lead to the charge rising significantly. Choosing this option is reflected in a reduction in your income when you take your benefits. However, unlike other schemes, the member doesn’t know how much of their future pension they are sacrificing when they make the decision.
Alternatively, some senior clinicians choose to opt-out of the pension scheme for a part of each tax year. Through careful management, this can effectively reduce pension input to keep it below the annual allowance limit.
The emergency solution for NHS pensions
Facing a staffing crisis, the government has come under pressure to come up with a solution.
In a statement released by the Department of Health and Social Care, emergency NHS pension measures have been revealed. The government will cover the bills of any clinicians affected by the Annual Allowance when they retire for the 2019/20 tax year. As a result, staff will be fully compensated for the effect of the ‘scheme pays’ deduction.
Health Secretary Matt Hancock said the decision has been made “for reasons of urgent operational necessity”. It means all clinicians will be able to take on additional shifts or sessions without worrying about pension charges. It’s hoped this will ease staffing pressures until a long-term solution has been agreed.
As a result, if you have opted out of your pension to manage pension input, you can opt back in without having to fear going over the annual allowance. Unfortunately, those that opted out at the beginning of the tax year to reduce input over the year have missed out.
This emergency measure won’t be applied retrospectively. So, if you’ve chosen ‘scheme pays’ for previous tax years, this will still affect your pension benefits at retirement. You should also review your pension contributions for the 2020/21 tax year in light of changes that are made over the next few months.
A long-term solution for NHS pensions
The government pledges to cover annual allowance bills is only designed to be an emergency measure. It’s still unclear what will happen in the short term.
We’ve previously taken a look at four ways the NHS pension crisis could be eased. These included measures that the Department of Health and Social Care was consulting on and could be implemented in the future. Among the proposals is a flexible accrual rate in 10% increments. This would make it easier to manage the annual allowance and offer the ability to reduce it when necessary.
NHS pensions became one of the key topics in the run-up to the general election. The Conservatives pledged to review the pension within the first 30 days of a new administration, so a long-term solution could be announced soon.
If you’re concerned about your NHS pension, please contact us.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
