Former pensions minister Baroness Ros Altmann has called on the new government to urgently reform several pension tax rules to remove complexity and help savers make better use of the pension freedoms.
Baroness Altmann wants both the lifetime and tapered annual allowances scrapped due to them causing “enormous problems” for some pension scheme members, especially those in the public sector, such as the NHS.
Introduced in 2016, the tapered annual allowance 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 taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
This has resulted in many senior doctors opting out of the NHS Pension Scheme, reducing their working hours or retiring early to avoid high tax charges.
Baroness Altmann said these unintended consequences must be addressed quickly.
She said: “It is a false economy. While the NHS wants to increase productivity, the pension system is perversely driving many experienced staff to do less work.
“There are examples of consultants who receive a promotion that they are told give them a pay rise, only to find they end up paying tens of thousands of pounds to the government instead.
“The pension scheme is meant to be a cornerstone of the staff reward package, but is turning into a mechanism that actually leads to sharp pay cuts, without warning, sometimes as a result of promotion or volunteering for extra work. The system must be reformed.”
To address this problem, the taper could apply to the past year’s earnings instead of the current year, Baroness Altmann suggested.
This would help people plan for the current year’s reduced allowance, as they should know what last year’s earnings were.
She also said that changing the complicated earnings calculations and the way defined benefit accruals are assessed for annual allowance tax purposes could help address this issue.
Baroness Altmann said: “In a defined contribution scheme, contributions are clear, but not for defined benefit schemes in which accrual is an actuarial calculation.
“In the NHS, the calculations are different for each pension scheme and the factor used to work out accruals could be adjusted to address the high pension accruals. Using the actual amounts contributed would be much easier to predict.”
Staff also need to be provided with individual financial advice to help them navigate the tapered annual allowance effectively, she said.
She also wants the lifetime allowance, currently set at £1,055,000, to be scrapped and instead the government should limit annual contributions.
Baroness Altmann explained the methodology for calculating whether someone has exceeded their LTA made the tax allowance greater by retiring earlier.
She said: “Pension tax rules which drive some of our most valuable NHS staff to stop working and give up on pensions are clearly counter-productive. These rules are seriously impacting availability of GPs across the country.