It’s time to crystallise my thoughts on yesterday’s Budget announcement that the pension thresholds are to be increased.
Let’s start with the basics. This is a very positive move, and as intended, it will stop many NHS GPs and consultants (and other high paid public sector employees) having to worry about their annual allowance being reduced from £40,000. Previously this could affect those with taxable income in excess of £110,000, but this threshold has been nearly doubled to £200,000. This will remove the vast majority of clinicians from this draconian legislation, which discouraged clinicians from working.
But (there is always a but):
- Those with taxable income in excess of £200,000 could be worse off as the minimum annual allowance has been reduced from £10,000 to £4,000. Remember that taxable income is income from all sources, not just NHS income. Therefore, clinicians with significant private wealth or other sources of income could be affected, even if their NHS income isn’t particularly high
- The annual allowance limit of £40,000 will still affect many pension scheme members, even if they are no longer affected by tapering
Consider a GP who is a member of the 2015 NHS Pension Scheme and has pensionable income of £135,000. Their pension will be increased by 1/54th of their pensionable income, so £2,500. Multiplying this by 16 to arrive at the deemed pension growth takes the GP up to the pension limit of £40,000.
However the pension growth calculation must also take into account the revaluation of all previous earnings, whether in the 1995/2008 or 2015 Scheme. As revaluation within these schemes is set at 1.5% above inflation, this will add to the deemed pension growth in the year. It’s impossible to generalise as each individual’s situation is different, but a clinician in their 50s could easily find £10,000 of their annual allowance used up by the growth relating to earlier years.
This then leads us on to what wasn’t announced yesterday. NHS Pensions were consulting last year on allowing members some flexibility of how much of their income they wanted to pension. The suggestion was that a member could decide at the beginning of the year that if they only wanted to pension 10%, 20%, 30% etc of their income, they could do so and only pay 10%, 20%, 30% of the normal contributions. The results of the consultation were expected to be announced yesterday to coincide with the budget, but nothing was forthcoming. Presumably this was because the increase in taper thresholds gets rid of the problem for many and perhaps because of the administrative complexities of introducing such a system.
Thus for those with pension growth in excess of the £40,000 allowance who want to continue to build their pension but avoid an extra tax charge, we are left with the ‘hokey-cokey’ as the only option.