Younger members of the NHS Pension Scheme have been warned that paying tax through their pension might not be in their best interest.
The government is introducing a change to the NHS Pension Scheme in England that will allow all doctors to use the ‘scheme pays’ facility.
This means they will be able to pay tax on any annual allowance breaches through their pension.
But Simon Farthing, senior financial consultant at Wesleyan, a specialist financial services mutual for doctors, told FTAdviser this will unlikely be the best solution for all NHS scheme members, especially those at the earlier stages of pension saving.
He said: "Scheme pays is effectively a loan and will reduce a member’s final retirement income.
"Some doctors, and especially those with some time to go until retirement, might be better off paying the annual allowance charges through self-assessment if they can afford it. Otherwise they may be left short in retirement."
However, Mr Farthing welcomed the change of rules, saying it could persuade more doctors to stay in the scheme.
It emerged in August that concerns about the tapered annual allowance, which came into effect in 2016, have led doctors to leave the pension scheme all together.
NHS scheme members can already ask for tax charges on breaches of the £40,000 annual allowance to be paid from their pension.
However, this does not apply to high earners who have their annual allowance tapered to £10,000. Those have to find the cash to cover the tax levied on the £30,000 difference.
Under the tapered annual allowance rules every £2 of income above £150,000 per annum sees £1 of annual allowance taken away.
The government is working on introducing new rules to bring these payments under the scheme pays rules in England, to bring them in line with rules in Scotland.
The change was petitioned by the British Medical Association and will be introduced as soon as possible, the government said.
Mr Farthing said: "It is rarely in anyone’s long-term interest to leave the NHS Pension Scheme and we believe the change in position for when members can use voluntary scheme pays will reduce the number of doctors considering this course of action.
"We’ve met with many doctors impacted by the tapered annual allowance who have been finding it difficult to pay their tax charges, especially as a charge can occur year after year."
Chase de Vere Medical, part of independent financial advice firm Chase de Vere, also welcomed the announced change.
Phil Bowler, business development manager at the firm, said: "We are in regular contact with the British Medical Association and knew that they were petitioning for this change and that it was likely to happen.
"This is a very welcome and overdue change to the rules and reflects the changes already made in Scotland, allowing doctors affected by the tapered annual allowance a lot more flexibility in respect of how to pay their annual allowance tax charge.