The government confirmed last week that they have accepted the recommendations of the Doctors’ and Dentists’ Review Body (DDRB) and subsequently announced an increase in pay…
Jeremy Hunt presented his Spring Budget on 15 March, including headline announcements aimed at resolving the issue of NHS pensions, which has been a subject regularly in the media and at the forefront of many minds.
In recent history, the NHS pension has disincentivised senior clinicians from continuing within the NHS in a full, or even reduced capacity. This is due to the Annual and Lifetime Allowances – thresholds where tax charges on pensions can arise.
What is the Annual Allowance?
To recap, the Annual Allowance (AA) is the amount that a) can be contributed in a ‘defined contribution’ pension, such as a personal or most non-public sector employer pensions, or b) the allowable amount of growth in a pension pot, under a ‘defined benefit’ pension, such as the NHS (or other public sector) schemes.
What is the Lifetime Allowance?
The Lifetime Allowance (LTA) is much the same, but is the amount that can be contributed, or built up, over an individual’s life.
Currently, the AA is £40,000 for most individuals. This can be ‘tapered’ for high income individuals, where their net ‘threshold’ income exceeds £200,000 and ‘adjusted’ income (including employer pension contributions or pension growth) exceeds £240,000. The AA can then be reduced to as little as £4,000, where the ‘adjusted’ figure exceeds £312,000 – clearly an issue for only the very highest paid individuals.
What is the issue with NHS pensions?
For the NHS pension scheme, the AA can be difficult. This is because scheme members do not have control over the growth in their pension. This is in part due to the older 1995/2008 scheme being linked to a final salary, meaning any large increases in pay (even today), such as an increment or pay award for a hospital consultant can create a significant amount of pension growth.
Also, under current rules (see more below), NHS pension growth can be affected by inflation and the disconnect between the amount HMRC allows and the amount that an individual’s pension is uplifted by NHS pensions.
In early February, I wrote a blog detailing the Department of Health and Social Care’s plans (by way of a consultation) for the NHS pension. In summary, the proposals were to make the NHS pension more flexible in retirement, by allowing scheme members to continue contributing in one or other of the schemes, whilst drawing benefits in another and to remove the punitive impact of the disconnect with inflation, as mentioned above. By and large, these proposals have been confirmed.
The AA has been set at £40,000 per year since 2014/15 – with increasing levels of pay since then, in real terms the threshold has reduced. In recent Budgets, the AA was frozen at this level until at least 2026/27.
Changes announced in the Spring Budget
Jeremy Hunt announced in his Budget statement that the Annual Allowance will be increased to £60,000 from 6 April 2023. For an individual regularly breaching £60,000 of pension savings/growth they would likely be taxed at 40-45%, meaning a saving of c.£8,000-£9,000 per year – clearly a significant amount. The tapering mentioned above will now only come into effect when ‘adjusted’ income exceeds £260,000 and the minimum AA will increase to £10,000 from £4,000 – £360,000 of adjusted income or more would leave the minimum £10,000 AA.
It’s likely that the majority of NHS pension members will no longer see AA charges (unless they retain final salary links with 1995/2008 benefits and receive pay increments in a given year) – this is in part due to the realignment of inflation (as mentioned above), but also because only very high earners would create sufficient pension growth to breach the new threshold. NHS pensions are uplifted by an amount of 1.5% above Consumer Price Index and this 1.5% will still add to pension growth.
There was even more welcome news. It had been rumoured that the Chancellor would increase the LTA to £1.8m, but he has instead scrapped it altogether. This means that from 6 April 2023 no one will be subject to an LTA charge. I think this is news that we never thought we’d see – it’s certainly is a long way from freezing the previous £1.073m limit for several years.
As a reminder, currently when the LTA is exceeded, tax is charged at either 25% if a pension/annuity is taken, or 55% if the pension pot is taken as a lump sum. As an example, if pension benefits are £2m, previously a tax charge of £231,725 would have been payable, albeit deducted from pension in retirement over a set period. That tax charge will now disappear. The Government will, however, recoup some of the cost of scrapping the LTA by collecting tax revenue on higher pensions paid in future.
A quirk of the changes relates to the pension lump sum. Individuals can access 25% of their pension pot free of tax from age 55. This was previously capped at 25% of the LTA, with any excess taxed at 55%. Moving forward, this cap remains at 25% of £1,073m, even though the LTA is being abolished.
In financial terms, these changes must make working in the NHS for longer periods of time more attractive and are likely to help retain the senior workforce. The British Medical Association and doctors in general appear to have reacted positively to the news. However, for the NHS to recover and for doctors to want to continue working, more action is still needed to address workloads and staffing levels. Despite the benefit the NHS pension scheme offers, clinicians cannot be expected to work well into their 60s at their current pace and pressure.
Read more analysis in our Spring Budget hub.