Pensions expert Nick Nesbitt describes the changing pension rules that give retired workers returning to the NHS greater flexibility – and considers the pros and cons
You don’t need to have a good memory to recall the crisis point reached during the 2019/20 tax year when NHS England stepped in and promised to meet the pension tax liabilities of all clinicians suffering Annual Allowance (AA) tax charges in that year. The intention was to stop doctors from reducing commitments or retiring early due to punitive pension tax liabilities.
Even more recently, early in the Covid-19 pandemic, the government suspended rules that limit the amount of work that certain medical staff can undertake after taking their pension benefits, known as retiring and returning.
Despite the relative recency of those changes, we once again find ourselves in a position where the government is urgently stepping in to address the unintended consequences of pension and tax legislation.
In September, health secretary Therese Coffey announced a further suspension of the rules that limit retiring and returning. In summary, until 31 March 2023, there will be no requirement to limit the hours worked in the first month of ‘retirement’ from the 1995 Scheme (the 16-hour rule) and no abatement (reduction) of the pension income for members of the 2008 or 2015 Schemes. Previously, those individuals had to reduce their working commitments by at least 10% to avoid a reduction in the newly received pension income.
In addition, and perhaps most significantly, there has been a longer-term suspension – to March 2025 – of rules affecting Special Class Status (SCS) workers. Historically, those members who can retire without reduction from the age of 55 onwards have had to limit the level of work they do between ages 55 and 60 to avoid the abatement of their pension. This suspension should therefore make it more compelling for individuals to take their pension when they’re entitled while continuing to work and contribute to the NHS.
These measures are certainly a positive step in removing barriers to certain individuals remaining in the medical profession.
At the same time, the health secretary announced that the Government will address the anomaly in the use of the CPI figure used within the NHS pension scheme in comparison with the figure used in Annual Allowance calculations. This anomaly is currently leading to GPs receiving high pension growth figures for the 2021/22 tax year and, due to the current high inflation environment, this position will only worsen for 2022/23 tax year if not addressed by 5 April 2023.
Although no further detail has yet been published, we are hoping to see an amendment to the NHS Pension Scheme rules to align the CPI figure used with that used in the AA calculations.
A further announcement made was the move to make Pension Recycling mandatory for NHS employers from 2023. Pension Recycling is the term used to describe the employer paying an employee a higher level of salary if they choose to opt out of the pension scheme. The higher level of salary reflects the employer saving the 14.38% employer pension contribution otherwise paid. However, initial indications suggest that this rule will only apply to those individuals who can prove that they are suffering pension tax charges.
While the intention of this legislation is clearly to make employers more flexible in supporting and retaining staff who may otherwise leave on account of pension tax issues, it does present two concerns:
- Having a set of rules that may only apply to a certain section of the workforce seems potentially discriminatory (as was seen with the McCloud judgement and rectifications).
- For some people, this will mean they could increase their gross earnings by over 28%. Clearly this will be attractive during a cost-of-living crisis but could be highly detrimental to their long-term pension position. There is a fear that many will take the opt-out decision without giving due consideration.
There are a number of other proposals regarding how the NHS can be more flexible in its approach to pension membership and retaining staff and we would welcome hearing about those.
However, any changes that create more options and complexity will naturally increase the need for GPs and wider NHS staff to take professional advice.
Nick Nesbitt is a Partner at Mazars