Defined Contribution  

DC scheme proposed to solve doctors’ woes

DC scheme proposed to solve doctors’ woes

Wealth manager Tilney is suggesting that the government should introduce a defined contribution section in the NHS Pension Scheme as a solution for doctors’ tax woes.

The Department for Health and Social Care yesterday (July 22) published its consultation proposing a new pensions option, which will allow doctors to build their NHS pension more gradually over their career without facing large tax charges.

The government, which has be facing requests to scrap the tapered annual allowance as it has been penalising doctors, stated the proposed rules would give clinicians the freedom to choose a pensions contribution other than 50 per cent – for example 25 or 75 per cent - and allow them to top up their pensions later in the tax year to maximise any remaining headroom in their annual allowance.

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But Gary Smith, chartered financial planner at Tilney, noted the 50:50 option was not a worthwhile solution as it reduces their pension accrual even further.

He said: "Receiving only 50 per cent of pension entitlement for each future years’ membership could result in senior NHS staff having to defer their retirement plans and/or seek alternative methods of saving towards their retirement."

Instead he proposed that the government opens a DC section within the pension fund, where staff could opt to join in rather than remain in the career average earnings section of the scheme.

Although Mr Smith recognised this wouldn’t provide the same benefits, he said it could be beneficial to some members since "they will know how much will be contributed into the DC scheme and can plan accordingly".

He said: "In the current scheme it is not the amount that is contributed into the scheme that is tested against the annual allowance but the deemed increase in the value of the pension benefits, and this is often higher than the amount contributed."

Also, a DC arrangement can offer greater flexibility in benefits at retirement, Mr Smith noted, as up to 25 per cent of the value can be taken as a pension lump sum, with the remaining available as income, and it allows death benefits.

Mr Smith added: "Members of the NHS scheme could use the DC scheme to fund their early retirement, thus enabling deferring accessing their career average scheme until closer to the normal retirement age, and reducing the impact of early retirement factors."

Concern about doctors' pensions has increased significantly 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.

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.