Finance has its say on pension plan

by Emma Knowles

08 November 2019

Finance practitioners call for different approach to pension tax problem

Recent pension tax changes have led some senior clinicians to refuse to take on additional work or decline promotions to avoid large tax bills. In more extreme cases, there are reports of doctors taking early retirement – all of which is exacerbating the current workforce issues and having an adverse impact on service delivery.

The issue is tricky to get your head round as it involves two quite complex factors – pensions and tax. The new tax arrangements apply to all individuals paying tax in the UK and are not limited to those working in the NHS. In May we published a ‘how it works’ briefing setting out what the issue is and why it is a particular problem for the NHS.

Put simply (ish), the issue has arisen because of significant reductions in the annual pension allowance – reducing the amount of tax-relieved savings that can be made to a pension – and the introduction of a taper that lowers this allowance from £40,000 to £10,000 for the highest earners. The arrangements have been in place for a number of years, but the ability to carry forward unused allowance from previous years has meant that the full impact has only started to be felt over the last 12 months.

The Department of Health and Social Care has proposed changes to the NHS Pension Scheme, rather that the tax rules causing the problem. The changes – consultation on which ended last week – would enable senior clinicians to tailor the rate at which their pension builds so they could manage their financial and tax arrangements more easily.

The HFMA’s response made two main points. First, the flexibility should apply to all members of the scheme – not just clinicians. Second, the proposed changes would increase the complexity of individuals’ pension arrangements and make the scheme more complex for NHS organisations.

We surveyed members in October to assess the impact of the proposed arrangements on finance staff and collect evidence to inform our response to the consultation. You can read a summary of survey responses here and our submission to the DHSC here.

Our response makes it clear that all NHS Pension Scheme members should be able to take advantage of the flexibilities proposed. The unintended consequences of the tax are having an impact on senior finance staff as well as clinicians. A quarter of respondents to our survey said that they had already taken action as a result of the issue and 53% indicated they were planning to do so. The range of measures taken included not applying for promotions, not taking a pay rise, reducing working hours, taking early retirement, leaving the pension scheme and leaving the NHS to work elsewhere.

At a time when dedicated and experienced senior management will be needed to implement the NHS long term plan, we cannot afford to lose experienced finance staff. Not extending the pension flexibilities to all staff in the NHS will result in a loss of talent as staff either refuse promotions or leave the NHS completely.

It is divisive and unfair to restrict the proposed flexibility to a particular staff group. There is no doubt that clinicians are key to the operation of the NHS. But other staff groups – such as finance staff – contribute to the effective running of the service and expect to be treated equitably.

It is also not only high earners who would benefit from more pension flexibility. One band 3 HFMA member said that they would like the option to reduce their pension contributions as they were unaffordable – currently their only option is to come out of the pension scheme completely. 

There is also a separate issue for staff in band 8a that means a small percentage pay increase pushes them into a new pension contribution band, resulting in a net decrease in take home pay, despite a pay rise and promotion. Being able to change contribution levels would make this more manageable.

The inequity in restricting eligibility to take advantage of the flexibilities is not the only problem with the proposals.

The proposals would also increase complexity for scheme members and organisations. Implementing the flexibilities will require the investment of additional resource by individuals, NHS bodies (as the employer) and the organisation that manages the scheme, NHS Business Services Authority (NHS BSA).

Members are already raising concerns with us about the NHS BSA’s capacity and the proposals, if implemented, will create further pressure, particularly at the year-end. 

Individuals will need more information on a timely basis to make the necessary decisions within the appropriate timescales. Additionally, any information provided by NHS BSA will only take account of information held by NHS employers in relation to NHS employment. The annual and lifetime allowance tax calculations will be based on all income received and all pensions contributed to. The analysis provided by NHS BSA will therefore not provide a complete picture on which decisions can be based. The arrangements will be so complicated that not many people will be able to manage their pension arrangements without support.

Many of our survey respondents would prefer to revert to the original tax thresholds, rather than have the NHS Pension Scheme tinkered with. This is unlikely to happen, but I doubt whether the DHSC consultation will be the end of the story.