Renewed calls to change tax treatment of doctors' pensions

Renewed calls to change tax treatment of doctors' pensions

The government should reform the rules governing doctors' pensions to allay a growing concern about the tax bills hitting members of the scheme, Royal London has urged.

In its 22-page policy paper Finding the right medicine – how to fix the problems between doctors and their pension scheme, the mutual insurer called for the tapered annual allowance to be abolished and the annual allowance to be cut instead as a solution to the problem.

The insurer's analysis follows a warning from the British Medical Association that doctors will reduce their NHS working hours "unless there is tangible reform to the NHS pension scheme".

The paper analysed several possible changes to the pension scheme rules, such as offering reduced pension for reduced contributions or the option of a voluntary cap on pensionable pay which could be tailored to the individual.

However, these were all "sticking plaster solutions to try to fix a fundamentally rotten system", Royal London stated.

It called the tapered annual allowance "one of the worst examples of unnecessary complexity in tax legislation in living memory", and claimed it had created "cliff-edges in the tax system, and makes taxation appear arbitrary and capricious to taxpayers in a way that is never desirable".

The tapered annual allowance means that for every £2 of income above £150,000 a year, £1 of annual allowance will be lost.

It emerged in December that the number of members leaving the NHS Pension Scheme was five times higher than that seen by other public pension funds.

Royal London stated that abolishing the tapered annual allowance would be the "cleanest solution".

To make up for the added tax relief given to taxpayers, the government could make an across-the-board cut to the annual allowance for all, decreasing it from the current £40,000 to £35,000 or £30,000.

The insurer also stated that HM Treasury needs to act quickly as in 2019-20 the tapered annual allowance will "start to bite much harder". This is because those who have been consistently high earners will no longer be able to carry forward significant amounts of unused allowance from earlier years before the taper was introduced.

Sir Steve Webb, former pensions minister and director of policy at Royal London, said it was "utterly absurd" that doctors are having to consider their pension tax position before deciding whether or not to take on an additional shift or cover for an absent colleague. 

He said: "The NHS is structured around senior clinicians taking on additional roles and responsibilities and this whole culture is being undermined by a bewildering system of pension tax relief.

"Rather than tinkering with the NHS pension scheme, the Treasury should abolish the ludicrous and capricious system of tapering annual allowances for tax relief. Patient care must not continue to suffer on the altar of Treasury intransigence."

Paul Stocks, financial services director at Dobson & Hodge, said these tax issues were not confined to the medical pension scheme and could arise for high earners under any defined benefit scheme.