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by Léa Legraien
10 June 2019
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The Government has proposed pension reforms aimed at stopping GPs from cutting hours or taking early retirement to avoid tax charges. But will they work? Lea Legraien reports
The first NHS workforce strategy in more than two decades was released in its interim version this week, with its centrepiece for GPs being changes to pensions.
After having been delayed twice – and published five months after the NHS long-term plan – there had been much expectation about what the report would hold for general practice and its chronic workforce shortage problems.
But the interim People Plan included only a few proposals concerning GPs – such as promotion of portfolio careers through a voluntary two-year primary care fellowship programme, to make general practice more attractive to medics.
The report’s standout solution affecting GPs was to make NHS staff pension contributions more ‘flexible’ for high earners, allowing them to pay in less and avoid incurring tax charges.
Policymakers heard ‘concerns from senior clinical staff that their current pensions taxation arrangements were discouraging them from doing extra work for patients and causing them to think hard about remaining in the NHS Pension Scheme or continuing to work in the NHS’, according to the report.
The Government hopes the changes, which will be consulted on from the end of June, will improve staffing shortages because fewer GPs will retire early or cut down on their sessions – but financial advisors and GPs disagree.
They say that any reduction in tax charges will be partly cancelled out by increases in income tax. More importantly, they highlight that GPs will have to work for longer to build up their pension pot.
Changes to pensions leading to tax charges
The NHS Pension Scheme has undergone significant changes in recent years, affecting GPs’ finances.
The annual cap on how much pension pots are allowed to increase by, tax-free, has been set at £40,000 since 2016.
GPs are hit with tax if they grow their pension savings by more than this in one year.
Also in 2016, the Government brought in new rules for the amount of tax-free pension benefits that can be accrued over a lifetime – reducing the limit from £1.25m to £1m.
At the same time the Government introduced new rules for the highest earners. These are people whose ‘adjusted income’ – all money earned, including from employee and employer pension contributions – exceeds £150,000 in a year, at the same time their ‘threshold income’ (not including contributions) is over £110,000 in a year.
Under new ‘tapered annual allowance’ rules, these highest earners can only have tax relief applied to a small amount of the pension benefits they grow in a year – which are calculated according to salary. This means their tax-free limit is cut – to as low as £10,000 for those earning the most.
Taken together, all of these changes have created little incentive for GPs to wait until retirement age to stop working – and has also prompted accountants to advise doctors in their 30s to cut clinical hours.
Flexible 50:50 pension scheme
The Government seems to have listened to GPs’ concerns.
Its solution is to offer NHS employees the chance to build up their pension pot more gradually, thereby avoiding charges.
Currently there is no flexibility in the amount of money NHS employees contribute towards their pension – with the highest earners being required to pay 14.5% of their salary.
As part of the new workforce strategy it was announced a new 50:50 pension scheme would be considered so that high earning GPs and other clinicians can cut their pension contributions by half and receive half the amount of their pension in return – meaning they avoid the tax penalties.
‘A cut in terms and conditions’
However, GPs say the small amount of extra disposable income they will have as a result of avoiding tax charges – plus paying in less to the scheme every month – is not worth the cut in pension growth.
GP Survival chair and pensions expert Dr Nicholas Grundy says: ‘It’s good that the Government have acknowledged that this is a problem, and are trying to address it. However, understandably, given how complex it is, they’ve failed to understand the problem – so I don’t think this will help.
‘In general terms, this is still a cut in terms and conditions. You end up paying less towards your pension and you will take a bit more home at the end of each month by avoiding annual allowance tax bills – but your pension is halved. That doesn’t seem very generous, or like a way of encouraging me to work harder.’
Echoing Dr Grundy’s comments, Kay Ingram, director of public policy at financial advice firm LEBC Group, says: ’The Government’s proposal to alter the NHS pension scheme to help clinicians avoid large tax charges when undertaking extra work treats the symptoms but not the cause of the damaging tapered tax relief regime for pension savings.
‘Those affected will therefore end up with slower pension accrual than colleagues who decline extra work. This is in effect a pay cut, only partly compensated by lower personal contributions being required.’
Paul Gordon, from medical finance advice firm Macarthur Gordon believes the measure might make matter worse for some GPs.
He explains that paying less in pension contributions will increase the amount of a GP’s salary that is subject to income tax.
He says: ‘The 50/50 adjustment is a step that will still leave many with tax charges, which for some could actually worsen as they are further impacted by increased taxable income when calculating the threshold income.’
Wider reform of pensions needed
The BMA has been calling for changes to the pension scheme for some time – but says the 50:50 scheme does not go far enough.
BMA chair Dr Chaand Nagpaul argues the measure will not prevent people from reducing their working hours.
He says: ‘We have modelled the proposed 50:50 scheme and it is clear that by itself this proposal will not remove the disincentive for doctors to reduce their working hours. It needs to be part of wider reform.
‘Given the complexities of the NHS pension scheme and the fact that individual circumstances vary, it is essential that any flexibility offers far more than simply paying half of the employee’s contribution for half the accrual of pension.
‘In addition, there needs to be the ability to recycle the employer’s pension contribution on the percentage of pay that is no longer pensionable.’
A BMA spokesperson adds that even with the 50:50 scheme in place, GPs could still fall foul of tax charges.
‘The fixed 50% arrangement could result in many years where GPs and consultants would still contribute at rates leading to a punitive and excessive annual allowance taxation charge and other years where inadequate pension contributions were made by the doctor, leading to a reduced pension at retirement. Rather than a fixed 50:50 approach, doctors need true flexibility with a range of options and mitigations for excessive annual allowance charges.’
In addition, one financial advisor argues it will not be possible for GPs to know in advance whether the 50:50 scheme will be of use to them.
James Gransby, partner at accountancy firm MHA MacIntyre Hudson, says: ‘GP partners don’t know their superannuable profit at the beginning of the year, so I’m not too sure how they are going to know prospectively whether they are eligible for the 50:50 scheme. It can take a few months after the end of the year until they’ve had their figures calculated.’
The proposed new pension scheme may provide some GPs with an option to avoid counter-productive charges.
But ultimately, the only way to address early retirements caused by the pension tax charges is to scrap the tax penalties altogether, according to the BMA.
‘Even full pension flexibility does not address the root cause of the current NHS pension crisis,’ says a spokesperson.
They add: ‘This tax arrangement is fundamentally flawed leading to “tax cliffs” which may cause tax rates over 100%. No-one, not least hardworking doctors, should be expected to do additional work and pay for the privilege.
‘The tapered annual allowance on defined benefits schemes must be scrapped in addition to any proposed pension flexibilities.’
Key sections of the interim People Plan report for GPs
This article was first published by our sister publication Pulse.