Insurers have criticised government plans to address the problems with the taxation of NHS pensions, as a temporary ‘Elastoplast’, which fails to tackle underlying complexities within the pension system.
There has been increased concern about consultants, GPs and other higher-earning NHS staff turning down additional work and overtime as they risk incurring large tax bills for breaching annual pension limits.
However, in an emergency announcement, the government has indicated that these additional tax bills will be covered by the NHS pension scheme under the “scheme pays” process.
But whereas this would normally result in a reduced pension at retirement, the government has confirmed it will make good any reduced pension.
However, because the NHS pension scheme is unfunded, the scheme will need to ask the NHS to provide this money to pay the tax bills to the Treasury.
Royal London’s director of policy Steve Webb says it is not clear where these additional funds will come from, in other words will the government provide this extra money, or will the NHS have to reduce clinical budgets to cover these bills?
He says these measures do not tackle the underlying cause, which is the ‘tapered annual allowance’ – a complex feature of the pension tax relief system which the Treasury was reviewing when the General Election was called.
Webb says that to date the Treasury has given no indication that this complex system of tax relief needs to change.
Webb adds: “The plan for the NHS to pay the tax bills of doctors amounts to a bizarre money-go-round with one part of the public sector paying money to another in order to resolve a short-term crisis.
“The fundamental problem here is the complex system of pension tax relief. The failure of the government to address this issue has resulted in emergency measures having to be taken in the middle of an election campaign simply to avoid a winter crisis in the NHS.
“The Treasury could have avoided all of these problems if it had simply admitted months ago that the pension tax relief system is too complex and had abolished the tapered annual allowance altogether”.
Aegon’s pension director Steven Cameron adds: “This solution will avoid medical professionals shouldering punitive tax bills but it is particularly convoluted. Effectively tax bills will be paid out of doctors’ pension pots. Then later the NHS will top up those pensions to compensate. Ironically, this could trigger another tax charge if the total paid into the pension in a future year exceeds the allowance then!
“Rather than rearranging the deckchairs, what we need is a fundamental review of how pension allowances work, not just for the NHS, so they reward good savings behaviour and never penalise taking on extra work.”
