TaxJul 23 2019

NHS doctors could be given cash in lieu of pension

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NHS doctors could be given cash in lieu of pension

The government will not stop NHS employers from offering cash in lieu of pension accrual as a way to prevent high tax bills, it has said.

In its consultation on new pension options for NHS clinicians published yesterday (July 22), the department for Health and Social Care stated some NHS trusts were considering offering affected staff an increased salary if they opt out of the pension scheme.

The government said while the current public sector reward policy was not to offer additional pay in lieu of pension contributions, the Department for Health and Social Care recognised that "NHS employers are independent of government and can take these decisions".

It added: "However, employers should consider the fairness and value for money of such an approach in the context of their whole workforce."

David Robbins, senior consultant at Willis Towers Watson, said the government appeared to be "giving a discreet nod to NHS trusts and telling them that they can offer cash in lieu of pension accrual, if this is what it takes to get doctors to fill their vacant shifts".

He added: "NHS chief executives who see their hospitals cancelling operations might well take note."

But he believed there was little appetite at the Treasury for such a solution.

He said: "The exchequer gets some extra tax and national insurance, but that is not enough to offset the lost employer and employee contributions."

He added: "The imperative for NHS managers and for ministers must be to find ways to ameliorate the very high marginal tax rates that the tapered annual allowance creates, so that senior clinicians are not incentivised to cut back their hours.

"If changes to the tax system aren’t going to happen quickly, if at all, cash alternatives to pensions could sometimes help."

In its consultation the government proposed a new pensions option for the NHS scheme, which will allow 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.

But the British Medical Association has already criticised the proposals, as it considers a 50:50 approach to be “a substantial pay cut for GPs and hospital doctors”.

Dr Rob Harwood, chair of the BMA consultants committee, said: “We wanted a consultation that included realistic options to bring an end to this ridiculous, but serious, crisis we are now facing.

“The BMA believes the only real solution is to scrap the annual or tapering allowances with immediate effect.”

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.

Claire Trott, head of pensions strategy at St. James’s Place, said offering cash in lieu of pension accrual was common practice in the private sector.

However, she alerted to the fact that the additional pay from the employer and the saving on the personal contributions will be subject to income tax and national insurance contributions.

She said: "So although they may be saving on pensions tax, they will see an increase in their income tax.

"I suspect the increase won’t be to the same level of the reduction in annual allowance charge and the tax will be payable through Paye meaning no surprises at the end of the tax year."

Commenting on the launch of the consultation, Health and Social Care secretary Matt Hancock said that the government wants “to make it easier for our hardworking senior doctors to balance their workload, their pension pot and their tax bill - with more flexibility, more choice, and less need to pay upfront”.

But Mike Lacey, partner at financial adviser Bowman Pension Consulting, said the government solution was “naïve at best”.

He said: “It’s a pay cut, given pensions have long been defined as deferred pay. Why would anyone agree to that?

"There are solutions to the issue of the annual allowance charges, but they would require the Treasury to change the rules – and that is supposedly off the table.

“Amendments such as changing the benefit accrual multiple for annual allowance purposes from 20 to say, 16, would reduce the tax charge.

"Increasing the annual allowance and the lifetime allowance would do the same, as would an extension to the period carry forward can be used – adding a year or two would allow affected staff to utilise previously unused annual allowance.”

maria.espadinha@ft.com

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