Government considers tempering the taper

But on August 7, the Treasury and the Department of Health and Social Care announced they would consult on rules concerning the NHS pension scheme, after a campaign was started by the medical profession to scrap the highly controversial tapered annual allowance.

The effect of the TPA on doctors has become particularly pressing in recent months. In early August, the British Medical Association reported that thousands of GPs and hospital consultants – across England, Wales and Northern Ireland – were slashing their working hours in an attempt to avoid being penalised by the allowance.

Dr Richard Vautrey, chair of the BMA GP committee, said the situation had reached the point where some doctors were feeling forced to leave their jobs.

“With patient lists growing and the numbers of GPs falling, swift and decisive action is needed from the government to end this shambolic situation and to limit the damage that a punitive pensions taxation system is inflicting on doctors, their patients and across the NHS as a whole.”

While the number of NHS staff exceeding the annual allowance averages 17,000 a year (see Table 1), it is the taper that has caused the issue. Statistics compiled by the BMA do not make for pleasant reading. In a survey of more than 6,000 doctors, 42 per cent of GPs said they have already reduced working hours because of recent pension tax changes, with an additional 34 per cent stating they plan to take the same action.

Table 1: NHS staff and the annual allowance

Source: Quilter FOI and NHS. Copyright: Money Management

The situation in hospitals paints an equally troublesome picture: the number of hospital consultants that said they had either cut back on hours, or were planning to, was 30 and 40 per cent respectively.

Taper cut

But this was only the start of the controversy. Intermediaries would have been familiar with the TPA’s potential complications as soon as it came into force on April 6 2016. But momentum around the need for its reform truly kicked off earlier this year when the issues that doctors have been facing hit the national press.

Newly appointed prime minister Boris Johnson vowed to tackle the problem, initial proposals to remedy the situation having not been warmly received. One of the immediate suggestions put forward by the DHSC was a 50:50 arrangement, whereby doctors could halve pension contributions to lessen the risk of breaching the allowance.

Jon Greer, head of retirement policy at Quilter, described this as the equivalent of a “Band-Aid being used when there is a heart attack”.

Mr Greer suggested the BMA statistics should provide the necessary impetus to prompt policymakers into taking swift action, and claimed the removal of the TPA was the only sensible outcome.

“At one point there was also a proposal to have a special tax arrangement for schemes, but the former chief secretary to the Treasury, Liz Truss, has already acknowledged in parliament that creating different rules in the tax system for certain sectors is not a practical option as it risks discrepancies and tax arbitrage,” he said.

“The only clear path seems to be to abolish the root of the problem – the TPA. While finding the much-needed cash for the move will be a treasure hunt, if they don’t the health of the nation is at risk.”

It is not just those in advice circles calling for reform. Karen Goldschmidt, chair of the Association of Consulting Actuaries’ pensions taxation committee, described the allowance as “unutterably complicated, both for the individuals impacted and for pension schemes that carry much of the burden of trying to make the system work”.

Ms Goldsmith said she was hopeful that the latest consultation would offer a clear set of proposals: “The Treasury will know from the work it did in the last exploration of pension taxation, launched in 2015 – which led to no clear consensus – that there is a real challenge in coming up with a method of taxing the accrual of defined benefit pensions in a fair and practical way. We look forward to being able to feed in views.”

Hit them high

The government, upon introducing the TPA, could surely not have foreseen such a situation unfolding. Its objective was to squeeze pensions tax relief for high earners – defined as those earning in excess of £150,000 per year.

In one sense, the taper is in the same vein as Alistair Darling’s special annual allowance, which was unveiled in 2009. But although the special annual allowance shared some similarities – most notably that contributions were limited to £20,000 for incomes of £130,000 and above – it was far less complex than the TPA.

As things stand, the taper works as follows: an individual sees their standard annual allowance of £40,000 drop by £1 for every £2 of income above the £150,000 threshold. This means those who earn more than £210,000 in any given year have a reduced annual allowance of £10,000.

This is where the simplicity ends, in part due to the fact there are two tipping points to consider: those with threshold income above £110,000, and those with adjusted income exceeding £150,000.

Threshold income is defined as an individual’s net income for the year. This is effectively defined as ‘all taxable income’ such as total employment remuneration, pension income, dividends, interest, and so on. The amount of any taxable lump sum pension death benefits paid during the year in question can also be deducted.

But the complexity doesn’t stop there. If, after calculation, threshold income exceeds £150,000, then the individual must ascertain their adjusted income – including all employer pension contributions, to stop individuals from circumventing restrictions by swapping their salary for employer contributions – to work out their final TPA.

As a result, even advisers well-versed on the taper’s requirements will need to commit time and resource to helping clients with high incomes calculate how much they can contribute to a pension.

There is also the question of whether those with threshold earnings of £149,999 should have an annual allowance that is quadruple that of someone with an income of £210,000 a year.

These issues have subsequently resulted in a coalition of advisers, individuals from the pensions industry and doctors aiming to force the government to scrap the TPA. A parliamentary petition started by surgeon Mark Cheetham had accrued more than 11,000 signatures at the time of writing.

Broad reform

But giving the taper the elbow is not without its complications. As Tom Selby, senior analyst at AJ Bell, noted in July, ditching the taper would “blow a £1bn hole in the Treasury’s coffers that would need to be plugged”. Chart 1 shows the recent and estimated tax takes from the policy.

That said, Mr Selby added that analysis of the TPA’s viability could yet trigger a broader review of the wider pensions tax regime, the intention being to both simplify the system and increase the number of people saving for retirement.

Most would agree with Mr Selby’s desire for a simplification of the pensions tax system, but would want to avoid a repeat of the last attempt, which was ironically the origin of the current saga. Pensions simplification, or A-Day as it is commonly known, gave birth to both the annual and lifetime allowances, both of which have subsequently been slashed from their initial levels. The TPA represented a further squeeze on contribution and funding limits.

Steven Cameron, pensions director at Aegon, agreed that the current controversy represented a good opportunity to make pension saving more attractive. “The current consultation is restricted to the NHS pension scheme. However, there are wider lessons to be learnt and we’d welcome a broader review of pensions tax rules, particularly in areas such as the TPA, which are hugely complex,” he said. 

“The main aim of pensions tax rules should be to incentivise people to save more for their retirement. Unfortunately, for an increasing number of people, they are having the unintended adverse consequence of discouraging them from taking on additional work or pushing them into early retirement.”

If the decision was made to scrap the TPA, it is likely it would be universally welcomed by the advice industry. But recent shifts by governments have been to squeeze pension contribution limits, rather than loosen them. This suggests few advisers will be holding out hope of the taper being scrapped in its entirety.