In the past few years the British Medical Association, the doctors’ trade union, has been waging a campaign to change the tax rules on its members’ pensions.
It says the current rules are pushing the most senior — and highest paid — consultants to retire early from the NHS, and discouraging others from doing the extra shifts needed to keep the NHS working.
The rules are designed to limit pension tax relief for the highest earners, so anyone with a total pension valued over £1.07mn — “the lifetime allowance” (LTA) — pays more tax on their pension. And anyone who saves more than £40,000 a year into their pension — “the annual allowance” (AA) — also pays more tax, which can be deferred until they receive their pension.
To remove the perverse disincentives for consultants, the new health secretary has just agreed to allow them to opt out of the NHS pension scheme, and receive a top-up cash payment equal to the employer’s pension contribution, as well as sorting out other glitches.
The net employer contribution is about 20 per cent of salary, and consultants will also save their own 12.5 per cent contribution, so pre-tax salary should increase by almost a third. (For no clear reason, employee contributions for the highest-paid NHS staff were reduced in April, and contributions increased for the lowest paid).
The BMA describes this sensible change as just “a sticking plaster and not the long-term fix the NHS desperately needs”. It still wants some sort of special treatment.
But the BMA isn’t telling the whole truth.
Although the headline LTA is £1.07mn, for public sector workers the real LTA is more than £1.5mn, so NHS consultants already get a much better deal than it appears.
For private sector defined contribution pensions, the LTA is simply the amount in a person’s pension pot. But public sector workers, with defined benefit (DB), have no individual pot, so the value is calculated by multiplying their pension by 20. This means they can have a £50,000 pension before hitting the LTA.
But this 20 times multiple hasn’t been updated since it was fixed in the 2004 “A-day” pension reform. Applying an updated multiple of around 30, means a consultant with a £50,000 pension has an LTA of £1.5mn, not £1mn.
The value of the £40,000 AA for DB pensions is calculated by multiplying the pension earned by 16 — fixed in 2010 — so you can earn £2,500 DB pension in a year. Applying an updated multiple of around 24 means a consultant can really earn a pension worth £60,000 a year, not £40,000.
The Treasury should update the LTA and AA multiples, putting public sector and private sector pensions on an equal tax footing.
A higher LTA multiple of 30 reduces the total pension consultants — as well as senior civil servants and MPs — can have, before hitting the LTA, from £50,000 to around £33,000. An AA multiple reduces the annual pension they can earn before hitting the AA, from £2,500 to around £1,700.
The government has already made concessions to placate the BMA. In 2020 the government diluted the AA “taper”, which had meant anyone earning more than £150,000, including pensions, would see their AA reduce on a sliding scale from £40,000 to £10,000.
But this was a crude sledgehammer, costing around £2bn, and helped everyone earning more than £200,000, not just NHS consultants.
Pensions and tax are a complex, and highly political, combination. Rather than acting as shop stewards, the BMA should provide better practical information to help consultants see the real value of their pensions, even after paying extra tax.
Unlike virtually all private sector workers, teachers, civil servants and NHS staff — including consultants — still get a guaranteed index-linked pension for life, equivalent to about 1/42nd of salary each year, with annual inflation increases, and a retirement age at the state pension age.
In all this talk of consultants’ pensions, we should remind ourselves that pension tax relief is designed to encourage people to save enough for a half-decent retirement, not to subsidise high earners.
The best way to do this is moving to a flat rate of tax relief at, say, 30 per cent on all annual pension savings. This is efficient, encouraging the lower-paid, including part-time workers, to save more, and also helps close the gender pension gap.
Flat rate tax relief is also fair. The current system is tilted in favour of the minority paying higher rate tax, who get a much bigger end-to-end tax benefit than the 20 per cent taxpayers.
For high earners — including NHS consultants — flat rate tax relief also cuts through the Gordian knot of the current complex rules, so the LTA and AA can be scrapped for all future pension savings.
John Ralfe is an independent pension consultant. Twitter: @johnralfe1