During late 2018 and continuing through 2019, it has become more evident that the recent changes in legislation to the tax relief available on pensions, but in particular the impact of this on the NHS pension, has become a topical subject and the impact of this has been widely publicised. Many GPs and Consultants have been leaving the NHS Pension Scheme, or looking to reduce working hours, which has had a huge impact on waiting lists and patient care in England.
We commented on the impact of this back in April this year and this article provides some further background of the issues involved – A Perfect Pension Storm
Following this publicity and the subsequent tax charges that came to light as a result of the introduction of the ‘Tapered’ Annual Allowance in April 2016, the government responded to the British Medical Association’s call for change by publishing a consultation document to address these problems on 22 July 2019. This consultation document was then quickly withdrawn, whilst the government appeared to require additional time to revisit its proposed changes.
On 11 September, the government published its revised consultation document which looks to build on the previously withdrawn proposals, adding further flexibility to the NHS pension scheme by allowing scheme members to limit their exposure to Annual Allowance charges, by altering their accrual rate and in turn their pension contributions.
Summary of main points published on 11 September
The previous consultation document sought to introduce the ‘50:50’ method, which would result in a member opting to pay 50% of the relevant pension contributions in return for 50% of the annual pension accrual.
However, the government has revised this in its latest consultation to add further flexibility by proposing the following:
- At the start of each scheme year (1 April) a member will be allowed to choose their own accrual level and therefore, pay correspondingly lower employee contributions. The accrual rate chosen would be based on a percentage of the normal accrual rate (1/54 of pensionable earnings for 2015 Scheme members) and can be adopted in 10% increments e.g. receive an annual pension accrual of 70% of standard, whilst only paying 70% of the standard employee pension contribution.
- In addition, members will be able to revise their accrual rates and pension contributions towards the end of the scheme year. This is so that they can review their level of income for that year and increase/decrease contributions as necessary, to allow members to fully utilise their Annual Allowance, whilst seeking to mitigate the risk of any Annual Allowance charges that might occur if pension growth exceeds their available allowances. Any arrears in respect of underpaid contributions, as a result of increasing the accrual/contribution rate, will need to be paid over as a lump sum before the end of the scheme year.
Scheme Pays Election
For those who aren’t aware, a Scheme Pays Election is an option that allows members to ask their NHS pension scheme to bear the cost of any Annual Allowance tax charges that they may face, by deducting these charges from their pension pot at retirement. The election is beneficial to those who do not have access to the many thousands of £s that could result from tax charges, however, it is important to note that interest is charged from the date in which the payment is made, until retirement – this interest is deducted from the available pension pot at retirement.
The consultation document proposes to offer more visibility when it comes to these tax payments.
The government’s proposal is to provide further clarity to members, as at present, the impact of Scheme Pays amounts on their final pension pots are not clear and neither is the impact of the interest charges that are also applied. The proposal seeks to introduce additional information to the annual member benefit statements by disclosing the impact of any Scheme Pays payments on a member’s pension pot at retirement as it increases each year as a result of interest charged. This will then also be compared with how a member’s pension also increases over time through annual pension pot revaluation or salary/pensionable earnings increase.
Recycling of employer contribution
The consultation document suggests that as a result of many members ceasing to pay in to the NHS pension scheme, as well as the proposed changes to the accrual rate, many employers are now considering the possibility of ‘recycling’ any remaining employer contributions into additional salary payable to that member.
The consultation document also allows the government to provide further clarity on such approaches once the flexibility arrangements are introduced.
At the time of writing, it is clear that these are proposed changes which are subject to the consultation process and therefore, if successful, will still require movement through parliament to finally become legislation. Therefore, until such time as legislation is published, the government’s proposal may well change and scheme members should be wary of acting until final details are available. In addition, to this, if HM Treasury were also to amend the rules relating to the Annual Allowance then the government would need to revisit this once more.
Should you require any further information regarding NHS Pensions Annual or Lifetime Allowance issues, then please contact Kieran.Hancock@pkf-francisclark.co.uk or your Francis Clark contact who will be happy to advise.
On a final note, NHS Employers has also published some guidance for employers so that they can look to assist their employees in the event of any tax charges – https://www.nhsemployers.org/case-studies-and-resources/2019/09/nhs-pensions-tax-guidance