The fragile state of the NHS was demonstrated yet again during the course of the government’s dispute with doctors over changes to the NHS Pension Scheme, which date back to 2010 onward. All public sector pensions have fallen victim to austerity policies following the financial crisis of 2007/8 and NHS Pensions have not been immune to the ensuing changes.
The issue of NHS Pensions was revisited following the appointment of Boris Johnson as Prime Minister. This was prompted by assertions that waiting times for elective surgery have been rising and treatment for cancer is being delayed because hospital consultants are refusing to work extra and paid overtime sessions. Clinical excellence awards for consultants, which supposedly reward service over and above the requirements of the job, are also being taxed.
Many general practitioners have taken early retirement to avoid punitive taxes on their pensions, thereby leading to a fall in the numbers of available family doctors. The government responded by promising a new consultation during the summer of 2019, with a view to introducing new changes from April 2020.
The NHS scheme has been one of the more generous of the public sector pension schemes in the UK, but several recent changes have made it less attractive than before and will affect new entrants to the scheme. The NHS Pension is a defined benefits scheme, rather than a defined contributions scheme. Currently, a specified annual pension payment and a lump sum are based on both the number of years of service and on the final salary achieved. This applies only to those eligible for pensions in the near future, rather than those due to reach pensionable age at a later time.
The Lifetime Allowance, or pension pot, is the total amount of pension savings that can be built up tax efficiently over one’s working lifetime. This sum represents the accrued capital value of one’s pension benefits. The pension savings that are counted in the Lifetime Allowance include any occupational pensions and private pensions in addition to the NHS pension. Pension savings that exceed the Lifetime Allowance are taxed at 25% if taken as income or 55% if taken as a lump sum. The Annual Allowance is the total tax-free amount that can be saved into the pension pot each year.
Several changes to the NHS pension scheme were introduced during the term of George Osborne as Chancellor of the Exchequer. The annual increases in the NHS pension fell as they were linked to the Consumer Price Index (CPI) from April 2011, rather than the Retail Price Index (RPI) as before. The annual Lifetime Allowance was reduced in April 2014 from £1.5 million to £1.25 million, and further fell to £1 million from April 2016. The Annual Allowance was reduced from £50,000 to £40,000, also in April 2014. The annual allowance has been tapered, since April 2016, above a threshold annual income of £110,000, reducing on a sliding scale to £10,000 for those earning £150,000 per year or above, up to £210,000. This means that extra earnings can lead to large and unexpected tax bills.
The 2015 NHS Pension Scheme came into force on April 1 2015 and applies to all new joiners to the scheme following that date. The new scheme is a career average revalued earnings (CARE) scheme, being based on a career average of pensionable pay rather than on final pay.
The present issues relate to those doctors who are in earlier NHS Pension Schemes (such as the 1995 and 2008 schemes), which are inflexible in regard to the rate at which pensions are allowed to build up. Overtime work may lead to financial penalties on the extra earnings. To further avoid these additional tax liabilities, many doctors have either cut back their hours of work, stuck to their contracted hours of work and turned down extra responsibilities or shifts, withdrawn from the NHS Pension Scheme, or even taken early retirement. Such decisions have had a negative impact on waiting list initiatives, which are meant to help with reducing elective surgical lists.
The present situation has arisen partly because the potential longer-term impacts of the several changes to NHS Pensions appear not to have been thought through, and partly because many doctors were either unaware of, or failed to understand, the implications of the changes. The 50:50 proposal by the government in June 2019 which recommended halving pension contributions to avoid tax charges was not widely accepted, leaving the way open for further adjustments.
It is hoped that an early resolution to the problem will be achieved that will work to the benefit of the NHS and its employees.
Ashis Banerjee (ex-NHS; pensioner)
PS: The March 2020 Budget raised the threshold income above which the annual pension allowance is tapered from £110, 000 to £200, 000.