TaxJun 26 2019

Doctors flock to advice after breaching allowance

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Doctors flock to advice after breaching allowance

Nine out of 10 doctors who have breached the annual allowance intend to take, or have taken, financial advice on their pensions tax position, according to research.

A report by pension provider First Actuarial into the impact of pensions tax on the NHS and the NHS Pension Scheme has found that, out of the 2,500 doctors surveyed, two in three (67 per cent) will take or have already taken advice from an independent financial adviser.

It was also suggested that it was difficult to find financial advisers who were willing to engage with members facing pension tax difficulties in the NHS Pension Scheme.

The NHS Pension Scheme currently has about 1.6m active members building up scheme benefits; 700,000 deferred members and 900,000 pensioner members in receipt of their pension.

Concern about doctors' pensions has increased since the introduction of the tapered annual allowance in 2016.

This gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.

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

Due to this many doctors are cutting down on overtime and some are exiting the scheme altogether.

First Actuarial stated: “We do not expect a large percentage of the workforce to be affected by annual allowance tax charges. However, in an organisation with well over a million employees even small percentages can mean a large number of people. 

“For example, with nearly 1.6m active members in the NHS Pension Scheme, if 2 per cent of the workforce are potentially affected this would mean around 32,000 people.”

The annual allowance, currently set at £40,000, is a limit on the amount of tax-relieved pension savings that can be made to registered pension schemes over a year. If an individual exceeds this limit they may incur a tax charge.

Tax rules allow any unused annual allowance in the last three pension input periods to be carried-forward and used to counter any breaches in the current year.

According to the research, nearly two thirds (56 per cent) of doctors expect to exceed the annual allowance in the future despite only 29 percent having breached the threshold previously.

First Actuarial suggested that the large numbers that believe they might be affected despite not having breached yet could be due to the combination of carry-forward running out and introduction of tapering in 2016. 

The research showed that nearly a third (805) of respondents have total pay exceeding £130,000 – this means their taxable pay (or threshold income) is likely to be greater than £110,000 so they are at a high risk of the tapered annual allowance.

Almost half (43 per cent) of doctors would rate their understanding of the annual allowance as ‘low’, with 40 per cent as ‘medium’ and 17 per cent as ‘high’. However, the level of understanding is strongly related to whether a person has breached the annual allowance in the past or not.

More than half of those surveyed became aware of the annual allowance through word of mouth, and around one in four heard via the news and/or an independent financial adviser.

The research also revealed that those with higher incomes are more likely to be aware of the tapered allowance. This is because people are more likely to be affected by tapering as their income rises, and some may become aware of tapering by being unknowingly caught-out by it when their taxable income crosses the £110,000 threshold, explained First Actuarial.

Dr Rob Harwood, British Medical Association consultant committee chairman, said that the tax charges as a result of exceeding the allowance are resulting in many doctors reconsidering their working patterns in the NHS which will have a direct impact on patient care. 

Dr Harwood said: “According to the NHS Employers report, a fifth of respondents have already reduced their working hours while a further four in 10 are considering this option in the future. 

"There was further evidence in the report of doctors deliberately choosing not to take on managerial roles. Just as worrying is that one out of four of those who could be affected are completely unaware of its potential impact, which dramatically underlines the lack of information from the NHS to doctors. 

“It is organisations like the BMA that are stepping in to provide support given the vacuum and unacceptable slow pace at which the government is reacting to this crisis.”

The research also got responses from 22 of the 30 NHS employers and found that 17 employers believe the tax issue affects more than just a small group of employees, and around a third (seven) believe the issue affects at least a relatively large group of employees.

It also found that 77 per cent of employers offered a little support on pensions, despite 59 per cent of employers being aware of employees who breach either the annual or lifetime allowance, which is currently set at £1.05m.

All employers have found that staff have approached them on pensions tax issues, but in most (73 per cent) of cases it was only a few employees.

Dr Harwood said: "Given this situation, patients are facing the prospect of fewer senior doctors on their wards and in their hospitals providing care.

“The government needs to wake up to the reality of the mess that these pension changes are causing. We have written to the Prime Minister and the Chancellor telling them that urgent action is needed. The next prime minister needs to get a grip rapidly and reverse these changes. We cannot allow this crisis to deepen any further.”

However, Ian Linden, technical manager of pensions at James Hay, said that although calculating the tapered annual allowance was "extremely complicated" the amount of people actually affected by it was minimal.

Mr Linden said: "In 2016 only 16,500 individuals told HM Revenue & Customs that they had an annual allowance charge to pay due to the tapered annual allowance.

"In reality this allowance is only affecting a small number of people and the furore and publicity that the British Medical Association has created around this issue has been blown out of proportion."

He added that if parliament caved in to pressure and introduced legislation to change the tapered annual allowance for doctors then all other public sector workers would want the same treatment.

On June 3, Health and Social Care secretary Matt Hancock announced that the government will consult on proposals to offer senior clinicians a new pensions option, which will allow them to build their NHS pension more gradually over their career without facing large tax charges.

Plans to introduce a 50:50 option would allow clinicians to "halve their pension contributions in exchange for halving the rate of pension growth", the Cabinet Office and Department of Health and Social Care stated.

However, the BMA stated that the 50:50 proposal will not remove the incentive for doctors to reduce their working hours.

amy.austin@ft.com

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