This article is by Dr Nitin Arora

I asked to publish it as I have followed his work on twitter to help pension professionals understand the current problems facing members of the NHS pension scheme. As I have written in a previous blog, there is no way of being absolutely fair in pensions, but we should not make pensions so hard that they distract working people from doing the jobs they were trained to do – and want to do.

As a jobbing NHS consultant, with no particular interest in finance or tax policy, I was surprised to receive an NHS pension statement a couple of years ago.

A colleague, who normally understands this area, took one look, and suggested I’d be liable for about £6000 in tax. I was stunned… and horrified. I did not have £6000 in the bank. ‘Scheme pays’ looked like a loan at 6% interest for >25 years!

Visits to 2 accountants, and an Independent Financial Advisor (IFA) ensured a start of understanding, and that there was enough ‘carry forward’ annual allowance to not have a tax liability.

This got me interested in personal taxation and how the NHS pension scheme works for us.

Over the last few weeks, a debate has raged on Social Media, with groups of doctors, some affiliated with the BMA, others not, that have tried to show finance professionals – financial journalists, IFAs, and pensions actuaries- how the NHS pension scheme rules, and the new tax treatment, treats people unfairly, and discourages hard work.

This blog is an attempt to collate some of the major themes of these discussions.

There are essentially 5 issues involved

1. Annual Allowance (AA): This is the amount of money one is allowed to contribute to a pension each year. Yet for NHS pensions and other DB schemes, this is not just your contribution + employers’. It is the PIA (Pensions input amount) which is the difference between last years’ value of your ‘notional pension pot’ (uprated with inflation) and the current years’.
   In addition, as most NHS consultants are members of 2 pension schemes 2015 and either 1995 or 2008, this takes into account growth in 2 pots.
   The growth in pension per year (1/54 of career average in 2015 scheme, 1/60 of best 3 years in 2008, and 1/80 of highest in last 3 years in 95 scheme) is multiplied by 16 for 2015 & 2008; and 19 (16*pension +3 lump sum) in 95 scheme to calculate PIA.The limit is currently £40,000 and you can ‘carry forward’ unused allowance from last 3 years
2. Removal of Personal Allowance: Between 100k and 123k taxable income, personal allowance is taken away at the rate of £1 for every £2 earned.
   Therefore, the effective tax rate in this band is at least 60% income tax + 2% NI
   As we will see in the worked examples, this tax could be much higher
   
3. Taper: Following the removal of 50% top rate tax, there was pressure on the Conservatives to increase tax rates for the higher paid. However, they chose to increase it (following the 2015 election) in the band 150-210k and leave it at 45% beyond that.
   Just as with personal allowance, you lose £1 of pension annual allowance for every £2 you earn above the £150,000 level until £210,000 when you then have £10,000 Annual Allowance. Thus the effective tax rate in this bracket is 67.5%However, this is complicated by the Threshold Income. This is your TOTAL income- (pension contributions + selected charitable donations+ allowable professional expenses).
   If this is <110,000 you’re clear
   If >110,000 HMRC will apply net adjusted income test
   Net Adjusted Income= Threshold Income + PIA
   If this number is >150,000 you would be subject to tapering of annual allowance, and subsequent tax on your pension input.
4. Lifetime Allowance (LTA): This is currently 1.03million, and will rise with inflation to 1.05 m in April 2019.
   This is calculated by knowing your total pension entitlement at retirement age * 20 for 2008 & 2015; and 23 for 95
   Anything above this is taxed at 55% for DC; and 25% extra tax for DB schemes.
   
5. The government have tinkered with pensions almost every year for the last 13 years.
   Here is a list kindly compiled by Alistair Cunningham. It seems difficult to believe this will not continue. We just have to do the best we can, but be prepared for the government to change the playing field.
   

Problems

The discussion was fast and furious, and tempers did flare up at some points, but it all settled when everyone realised that the anger was born out of frustration and fear-
Drs were afraid that the NHS pension scheme over which they’d based their future financial security was changing, and becoming less certain, and this was a triple whammy- coming on top of previous pension changes, changes to retirement age, and a substantial (>20%) fall in salaries in real terms in the last 10 years

This is my summary of the problems highlighted

1. How AA and Taper affect people. This prompted an example from Dr Goldstone:
   Consultant A has total taxable income of £109,900. Does an extra clinic to help the department.
   As you can see on the right side of this table, this £200 clinic can result in a £13,500 tax charge if it a year with a pensionable tax rise for this consultant! This is a marginal tax rate of thousands of percent! The very definition of a ‘cliff edge’The Spreadsheet from Dr Goldstone can be found here

   

    

2. LTA: This has yo-yo’d over the last 13 years and it seems impossible to predict where it will be in 10 years. The prospect of paying 25% extra tax for pension above approx 45,000/yr (95 pension) or 50,000/yr (2008/2015)may seem unfair, but this really amounts to total 55% tax for pension pot >1million. So if in a year, you contribute £12,000 and have pension growth of £40k, you will get £2,000 extra in pension. Even with 55% tax, this is £900/year in extra pension for life (after tax) with a total investment of £12,000 (pre-tax. More like £7200 after tax).
   
3. How scheme pays may work for you, but reduce pension.
   The effect of exceeding threshold income with non pensionable work is to either reduce current take-home by paying tax; or future pension by scheme pays.
   In any case, with income >£110,000, further non-pensionable work may not be worth it.
   
4. Most NHS consultants will be in 2 pension schemes- 2015 and 1995 or 2008
   Growth in both is counted separately. So even if you have exceeded Annual Allowance,  (for instance) you had a growth of £25,000 in each scheme, they may not inform you.
   Also, your 95 section PIA can be negative if your salary goes down-  reduced on-call allowance or CEAs. Unfortunately, this negative number is counted as zero in the PIA and therefore while when your on-call allowance went up, you paid tax on the increase, when you drop, the negative is not allowed to be carried forward.
   For instance, a colleague had increase in on-call allowance from 3 to 5% (1:9 to 1:8 rota)
   This prompted a tax charge. 3 years later, a drop back to 1:9 would reduce the pension pot in the 95 section, but this would count as 0 and not carry forward as a loss.
   Another colleague had -4000 growth in the 95 section, and 46,000 in the 2015 section. Had to pay tax on 6000, because the -4000 counted as 0!
   This is at odds with other taxes- where you are allowed to carry forward losses (e.g. CGT)
   
5. NHS workers (just like most DB schemes) have little or no control over PIA in any given year. And often don’t know if they’ve breached AA at all until well after the event. Do we really need to have BOTH AA and LTA for DB schemes?
   
6. It is extremely complex to manage NHPS Scheme pays.
   Most of us have 2 schemes, with complicated formulae for how scheme pays would be split between them, and also deadlines, and form-filling.
   
7. NHS pensions do not automatically send out statements, and when requested, statements take months to arrive, often after the deadline for filing returns has passed.
   
8. Having all of AA, Tapering and LTA seems like double, or even triple taxation. Especially if you’re still in the 100-123,000 taper zone while also being hit by AA taper. Here’s another example: 48 yr old consultant £99254  basic, 3% on call supplement. Increment 4 months into tax year.
   15 yrs in 95 scheme; 3 in 2015
   12 PA, 15k in WLI/extras
   Puts you on ~£125k after pension contribution
   With PIA, takes you to £165k
   With taper, you pay £15k in extra tax for the 15k of WLIs

Mutual Learning

What did the people from the financial/pensions industry say they’d learned from this mega-thread:

1. That there is a cliff edge, and huge marginal tax rates; and these don’t start at 150,000 but at a much lower level. This is partly because Drs do a lot of non-pensionable work. This generates AA related taper, and tax, but no additional pension entitlement.
2. Drs are frightened, and this may prompt many to stop doing extra non-pensionable work. And that professionals in the personal finance industry need to accept the humanity and emotions that are connected to pensions
3. The interest rate on scheme pays is very high and could result in a £10,000 tax liability becoming ~£26000 in 27 years (even though this would be partly offset by being charged against pre-tax pension pot)

What did consultants learn?

1. Scheme pays could actually work for many people, especially if likely to breach LTA, since this charge comes off the top. In short:
   1. If you’re within 10 years of retirement: think about using scheme pays. It’s probably worth it. The time scale isn’t long enough for interest to be a major issue.
   2. If >20 years from retirement: think carefully. Scheme pays may be worth it, but the interest rate will be high for a long time- enough for compounding to do real damage. If you’re likely to breach LTA, probably still worth it.
   3. If 10-20 years to retirement: Think carefully; and do your sums. Consult an IFA. Scheme pays is likely to be useful.
2. LTA breach is not a reason to retire- you still gain from the NHSP, just not as much
3. Use an IFA who understands NHSP. There are specialists out there. 

My Conclusion

This may well be the next big crisis facing the NHS

There are a number of hospitals running with lots of consultants doing extra lists. If these lists become subject to a marginal tax rate of >80%, and for narrow bands, >100%; it will be difficult to find people willing to work extra hours for minimal or no reward.

The advice from financial professionals was to try and

1. Use scheme pays
2. Do less non-pensionable work
3. Try and stay below £110,000 of taxable income

The problem the NHS has is that we have most consultants working ~20% more than full time, with anything over 10PA being non-pensionable; and lots of departments rely on consultants doing extra lists.This is not conducive to efficient tax planning for individuals.

When people realise that their extra 20k of income results in a 12k tax bill, and potentially 3-5k of ‘scheme pays’ they may elect to stop doing this extra work.

We as custodians of the NHS need to look at the bigger picture, and alert the government to the impending crisis. The taper, AA and LTA together, are going to drive an already demoralised workforce to cut working time. At this time of an overstretched health service, and staff shortages, this would be a disaster.

Disclaimer

I am not a FCA regulated professional. And this is my understanding of the current pension/tax position.

This is not intended as financial advice.