Are you an NHS doctor with annual allowance concerns? Recent pension legislation changes have caused some unintended consequences regarding our NHS doctors’ annual allowance, leading many doctors to retire early, leave the NHS pension scheme or dramatically reduce their working commitments.
All of which have a huge knock-on effect on their families, their future wealth and the NHS service as a whole.
Up until now, this pension legislation has only impacted a relatively small part of the population, however, the impact on our clients has been dramatic! The government is unlikely to change the general legislation, as it could be seen as protecting the wealthier parts of society – not a big vote winner!
This story has taken a while to reach the wider readership of the Sunday papers due to its seemingly narrow field of impact! However, the grave knock on effect to the wider population is just beginning to dawn, as we start to lose many of our experienced NHS doctors. So much so the NHS has recently announced a consultation.
For once, I thought I would look to the future using my crystal ball to see what changes could be made to the NHS pension scheme in light of this legislation.
It is becoming more likely the NHS pension scheme will need to change, again. The irony is that after the large-scale changes made in 2015, they were not expecting to make any further alterations for at least another 20 years or so. That was the theory anyway!
The pension accrual needs to be slowed down, or, significant pay rises avoided to help with the annual allowance issue. This ludicrous system of creating a cliff edge at £110,000 known as the ‘Threshold Income’ makes it very difficult to plan. Often you may not know how much you are able to contribute to a pension environment until very late in the tax year.
Those doctors’ who have the 1995 NHS pension scheme can see a dramatic rise in their annual allowance when they have a significant rise in their superannuated income.
On the other hand, the new 2015 NHS pension scheme uses career averaged earnings. It does not cause these spikes and avoids some of the risks of breaching your annual allowance. Therefore, there is an argument that over time it could be less of an issue as the majority of members are now in the 2015 scheme.
However, it’s a ‘swings and roundabouts’ scenario as the 2015 NHS pension scheme has a low accrual rate (you get more benefit for each year you work) and is therefore arguably more generous, which in turn adds to the problem again!
Sadly, I do not have the power to whisper suggestions into the ear of the powers that be! However, if I did, these would be my solutions:
You may have heard of the term ‘hokey cokey’ where members opt in and out, of the NHS pension scheme to try and mitigate tax charges.
Leaving the NHS pension scheme and opting in and out, is fraught with issues. It also impacts other areas such as the death in service and ill health pension. If a formal opt in and opt out scheme were introduced, then an enhanced opt-out option would be a helpful solution. This would allow members to retain other valuable benefits such as death in service and ill health benefits.
A better way to achieve the same effect is to reduce the accrual rate (this is the rate at which you amass pension benefits for every year you work in the NHS).
Instead of having a 1/54th rate, it changes to a 1/108th accrual rate. Or better still, be given a choice of accrual rates. Offer a faster accrual for those who join the NHS pension scheme late, and a slower accrual for those who intend to make a career of working in the NHS.
These methods would reduce the possibility that members would breach their annual allowance, and therefore be more likely to want to remain in the NHS pension scheme throughout their career.
The USS (Universities Superannuation Scheme) has options around pay caps to help avoid annual and lifetime allowance issues. However, this is not without complications. Junior doctor’s see a significant superannuated income rise when they move into the consultancy field. This pay increase may cause an annual allowance issue, however, the junior doctor’s income could still be below the pay cap.
This could be mitigated by allowing members to choose which aspects of their pay they superannuate – putting them more in control!
These are the musings of an IFA, not a cabinet minister or a big wig at the NHS pension scheme. As we can see, there is no single solution that resolves the issues.
In my opinion, the NHS pension scheme requires more flexibility in the way it operates, and it needs to change quickly. Noise is building around this subject both in the press and online, you may even be aware of colleagues already taking action. However, it’s important you take a considered approach.
This is a very complex area and your circumstances are unique to you. Therefore I strongly recommend that you take the time to obtain advice from a specialist financial adviser who truly understands the NHS pension scheme, allowing you to make an informed decision.
Medics’ Money can match you with a specialist medical Independent Financial Adviser and the free consultation is free. Search and compare here