Pensions  

Doctors still better off in pension scheme despite tax tinkering

Doctors still better off in pension scheme despite tax tinkering
 Pexels/Gustavo Fring

The chancellor’s Budget announcement that the lifetime allowance is to be frozen at its current level of £1,073,100 until April 2026 has set the government on a fresh collision course with doctors.

A British Medical Association survey revealed that 72 per cent of doctors said this policy would make them more likely to retire early, while 61 per cent said it would make them more likely to reduce their hours.   

But the parliamentary brief that sets out this unhappy member response is as rich in generalisations as it is in impassioned argument. So care needs to be taken not to let our support for the NHS cloud the issues. 

For example, it is fair to say the level of the tapered annual allowance can be a disincentive to extra shift work – arguably making an extension of last year’s government promises to effectively underwrite doctors’ annual allowance charges, a reasonable and proportionate response to the demands created by the continuing healthcare crisis. 

What is more difficult to see is how decoupling the LTA from consumer price index growth disproportionately affects doctors. Overtime payments are not pensionable under the NHS Pension Scheme and this Budget measure should therefore not impact willingness to work additional shifts either during this current crisis or later.

But if that is the overriding perception, then more needs to be done to inform clinicians how any decisions they make about extra hours or responsibilities will interact with pension tax allowances.  

And that means understanding whether the additional benefits accrued by staying in the scheme are worth the cost to the member, taking into account their own contributions.

The value of advice in helping members make this cost/reward assessment is inestimable. The example below suggests how advisers might set about the calculations necessary to demonstrate the position. 

In this example the member is currently aged 50, has benefits in both the 1995 section of the final salary scheme and in the career-average scheme, and will retire in 10 years’ time. 

From crunching the numbers we can see that despite the five-year hiatus in LTA growth, this member will build up entitlement to an extra £13,811 gross pension each year for a net cost of £94,167. 

Taking the calculation one step further, if the member lives for 20 years following retirement and pays income tax at 40 per cent on that extra pension, he will enjoy a total of £165,732 in net pension over his retirement for that net cost. 

And, of course, the impact on ancillary benefits of deferral should they die or be unable to work through ill health before retirement should also be factored into the decision-making process. Whether this trade-off looks attractive to the member will depend in large part on their longevity expectations.

       

Member opts out

Member remains in scheme to age 60

LTA frozen until April 2026

Pensionable pay at April 21

£104,604

£104,604

Current pension rights:

  • 25 years 1995 section
  • 6 years career average
  • 1995 section lump sum

 

£32,689

£12,241

£98,067

 

£32,689

£12,241

£98,067

LTA utilisation at April 21

£996,667 (92.88%)

£996,667 (92.88%)

LTA at retirement

£1,184,789

£1,184,789

Pension rights at retirement*:

  • 25 years 1995 section
  • 16 years career average (actuarially adjusted)**
  • 1995 section lump sum

 

£39,848***

£10,371

£119,544***

 

£37,937

£29,279

£113,811

LTA utilisation at retirement

£1,123,924

£1,458,131

LTA excess

£0

£273,342

LTA charge 25% (excess taken as income)

£0

£68,336

Reduction in pension (excess/GAD factor of 21.45)

£0

£3,186

Gross pension after charge

£50,219

£64,030

Net cost of employee contributions

£0

£94,167

Additional pension built-up by remaining in scheme membership

N/A

£13,811

* Assumes pay growth of 1.5%
** Assumes CPI of 2%
*** Final salary benefits on deferral exceed final salary benefits on continuing active membership as CPI growth exceeds pay growth.