Change pension rules for all higher earners, not just doctors

Government proposals to change the pension taper rule for doctors only have been widely criticised.

The government has stepped in to help stop doctors and other senior medical professionals being negatively impacted by pension rules.

As previously reported by Money Observer, doctors face punishing tax penalties for inadvertently breaching the legal limit for tax-free annual contributions to their pensions. 

The problems started following the introduction of the tapered pension allowance for high-earning professionals in April 2016, which we explain in more detail below. The allowance reduces the amount of tax relief high earners are able to get on their pension contributions.

Many doctors have been breaching the allowance by working overtime to cover NHS shortfalls, and have incurred the tax charges. Others have been reducing their working hours or even deciding to retire early.

Under new changes outlined today (7 August) by the government, doctors will be able to alter their contributions into the NHS pension scheme to reduce or avoid potential tax charges.

The government also announced it will review the annual allowance taper for doctors.

Chancellor Sajid Javid said:

"This government is committed to ensuring that British people see a real difference in public services, including getting quicker GP appointments, and a reduction in waiting times.

"Critical to that is introducing flexibility into the system so that our hospitals have the staff they need to deliver high-quality patient care, which is why we've listened to concerns and will be reviewing the operation of the tapered annual allowance. This will help to support the delivery of our vital public services."

The move to consider changing the pension taper rule for doctors but leave the rules the same for other high earners has been widely criticised.

Steven Cameron, pensions director at Aegon, described the proposal as "worrying". He said: "These highly complex rules are affecting an increasing number of individuals across many employment sectors, public and private.

"We recognise the hugely important contribution to society medical professionals play. But this should be reflected in their pay, not through some concession linked to tax rules on pensions. If we start linking pensions tax allowances to a value judgement about the nature of people's work, where might this take us?"

Other commentators, including Royal London's Steve Webb, the former pensions minister, and Gary Smith, chartered financial planner at Tilney, called for an outright ban of the tapered annual allowance.

"This problem is not unique to the NHS nor even just to the public sector, and so any review must be comprehensive and cover everyone affected by this absurdly complex taper, including in the private sector," said Webb.

He added:

"The best solution by far would be outright abolition, even if this meant a slightly lower annual allowance across the board."

Smith agrees any changes to the pension taper allowance should apply to all pension funding, not just members of the NHS pension scheme.

"I fear that the government will choose to only remove this from NHS pension members, which would be grossly unfair and create a two-tier pension system that would further exacerbate the public-private sector pension divide.

"I would urge the new chancellor to make a bold statement and scrap this ill-thought-out and complex piece of pension legislation, for all pension savers in the UK."

Under the taper system introduced in the 2016/17 tax year, high earners with an income above £150,000 are severely restricted in regard to how much they can save into their pensions, as their £40,000 annual allowance is reduced by £1 for every £2 of income above £150,000, with a maximum reduction of £30,000. Therefore, anyone earning more than £210,000 can pay only £10,000 into a pension each year.

These restrictions combined with the pension lifetime allowance, which stands at £1.055 million, have led to some doctors opting to retire early or reduce their hours.

Those who breach the lifetime allowance are heavily penalised, with punitive tax charges of 55% due on money above the limit if it is taken as a lump sum, or 25% if it is taken as income.

The British Medical Association (BMA) has been lobbying the government over the issue. It argues that if doctors are penalised for covering vacancies or helping reduce waiting times, the NHS will reach crisis point.

BMA number-crunching shows that a part-time GP takes home just £338 a year less than a full-time GP, despite working half the hours, primarily because of the pension tax charges incurred by full-time GPs.

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