PensionsOct 7 2021

NHS failings led to pension tax charge for doctor

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NHS failings led to pension tax charge for doctor

Dr N had complained to the ombudsman that the tax charge applied to his pension commencement lump sum could have been avoided, or significantly reduced, if NHS BSA and PCSE had acted on his requests to update his pensionable pay figures before his retirement.

Both NHS BSA and PCSE have been instructed to repay the claimant £1,919.73 each towards the lifetime allowance charge that was incurred, as well as a further settlement to compensate for the distress caused.

It follows a series of cases of NHS Pension Scheme members facing costly tax charges, while staff have increasingly been opting out of the scheme.

Domino effect

In November 2016, Dr N emailed PCSE explaining that NHS BSA had not been updated with his correct pay. His actual earnings were £95,000, while NHS BCA was only aware of earnings of £28,000.

PCSE then confirmed receipt of the updated pay information but said it needed to identify the money in NHS England’s bank account before it could be allocated to his record, adding NHS BSA would not be updated until the entire year was reconciled, and Dr N’s 2016-17 self-assessment form was submitted.

In response, Dr N asked for his contributions to be brought up to date with NHS Pensions as soon as possible to avoid problems with tax.

Dr N said he was concerned that his superannuation contributions for the 2016-17 financial year have not been brought up to date, which was “obviously relevant in relation to the LTA”.

In January 2017, Dr N retired with a pension commencement lump sum of £225,300. The value of Dr N’s benefits for testing against the LTA exceeded the allowance, but he held enhanced protection against any LTA charges.

However, NHS BSA, after receiving a revised pensionable pay figure from PCSE, said the pension lump sum was now worth £234,900 — some £9,600 more than previously calculated.

A letter from NHS BSA in March 2018 stated Dr N’s enhanced protection eliminated any LTA charge on the annual pension, but it did not increase the pension lump sum that could be taken.

NHS BSA said the additional lump sum was therefore an unauthorised payment and was liable for a tax charge of 40 per cent, worth £3,840.

After the case was raised with the Pensions Ombudsman, it concluded that while Dr N had incurred a tax liability, he should have been informed of the consequences in advance so that he could mitigate or minimise the payment. The situation was worsened by PCSE failing to update his records in good time.

Ombudsman Anthony Arter said: “NHS BSA had no duty to actively advise Dr N how to best access his pension.

“However, it did owe a duty of care to ensure that its answers to specific questions about the availability of enhanced protection and possible LTA charges, where it was clear he intended to rely on it, were accurate and complete.

“I find that NHS BSA’s statement that Dr N had retained enhanced protection was incomplete and misleading.”

PCSE and NHS BSA have been instructed to each pay Dr N £250 in respect of the “significant distress and inconvenience caused”.

Pension Scheme woes

The ombudsman's conclusion was the latest in a series of issues that have plagued the NHS Pension Scheme.

In May, it was revealed that nearly 40 per cent of the NHS staff who breached their annual allowance in 2018-19 turned to scheme pays to help them foot the bill, according to research from Quilter, which warned of a legacy of allowance issues for many doctors.

The figures showed that in 2018-19 some 13,548 members exceeded the annual allowance, with 5,115 (38 per cent) electing for scheme pays to help them pay the bill.

This compared with 22,428 breaching the allowance in 2011-12, but only 776 (3.5 per cent) turning to scheme pays for help.

The pensions tax system has been adversely affecting doctors for some time, and although the Budget 2020 lifted the adjusted income and threshold income levels under the tapered annual allowance by £90,000 for the 2020-21 tax year, there is still a legacy of annual allowance issues for many doctors.

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 an LTA tax charge on their benefits.

The rules have forced senior clinicians and other high earning public sector workers to either leave their pension scheme, cut down on their working hours, or retire early to avoid punitive tax bills.

Tom Higgins writes for FTAdviser's sister publication Pensions Expert