In recent weeks news of the fallout from doctors receiving large tax bills relating to their NHS pensions have been hitting the headlines. We hear reports that those affected are retiring early and turning down shifts to avoid getting landed with tax bills.
At the centre of this dispute are the annual allowance rules.
The annual allowance is a limit on the total amount that can be paid into your pension each year and still receive tax relief; currently capped at £40,000
This recent issue with doctors has come about largely due to the tapered annual allowance which was introduced in 2016 to further restrict the amount of pension tax relief available for high earners.
These rules mean that anyone with an adjusted income over £150,000 will have their annual allowance reduced by £1 for every £2 of income over £150,000. The maximum reduction is £30,000, reached by individuals earning £210,000 or over, resulting in an annual allowance of £10,000.
Any breach in annual allowance is tax charged at the individuals’ highest tax rate. This will be either 40 per cent or 45 per cent. It has resulted in many more doctors paying higher amounts of tax for remaining in the NHS Pension Scheme.
The NHS Pension Scheme is a defined benefit scheme where the value of the final benefits is not dependent on investment returns but a percentage of the pensionable pay. The value placed on this type pension scheme is high and when assessed together with high salaries doctors get caught more often than any other working group.
The British Medical Association are calling for “removing – or seriously overhauling – the annual and lifetime allowance cap for all public sector workers”.
Such reactive ‘tinkering’ with pension legislation can lead to further unforeseen consequences.
It has long been said that changes to UK pensions by successive governments have added increasing complexity and led to many disengaging with their retirement provision altogether.
A recent, and seemingly successful, policy response to this disengagement is the automatic enrolment legislation. The auto enrolment process is based on nudge theory and has inertia at its core. The result of the legislation is that millions more workers are now saving towards retirement.
For too many people pensions feel complex, dull and boring. A remedy for those who feel this way, but who also recognise the importance of planning for retirement, is to engage with an adviser.
Many of our clients who lead busy lives do not suffer inertia, but simply do not have the time to devote to pension education and analysis sufficient to make informed decisions. Quite rightly they prefer to focus energies on their own career, business or other interests.
Taking that first step to engage with an adviser is often the key to making progress. When facing non urgent yet important issues like pensions I fully support the maxim that “sometimes half the work is getting started”.
Barra Gorman APFS
Chartered Financial Planner