The Government is proposing flexible pension accrual as a means to help NHS clinicians cope with the Annual Allowance.
The Annual Allowance restricts the value of tax-favoured pension an individual can build up in each tax year. The standard allowance is £40,000 but, for those with income in excess of £150,000, it is tapered by £1 for every £2 of excess income up to £210,000, at which point it is fixed at £10,000.
This restriction has caused planning issues for many savers and their employers across many sectors of the economy. The public sector, with its continued use of inflexible defined benefit schemes, has been particularly affected – not least the NHS, with many highly paid clinicians responding by either taking early retirement or reducing their working hours.
The Government responded to this worsening problem on 22 July 2019 with a consultation setting out proposals that would allow NHS clinicians to halve their pension accrual in return for paying half-rate contributions – the so-called 50:50 option.
Then, on 7 August, that consultation was effectively withdrawn. The Government announced instead that a new, forthcoming consultation would set out proposals for full flexibility in pension accrual – so, 30 percent contributions would secure a 30 percent accrual rate, for example. The flexibility would be offered in 10 percent increments and available from the start of the next financial year. Employers could choose to recycle their ‘unused’ contribution back into the employee’s salary.
Could the changes go wider?
As things stand, we expect the proposals to be limited to the NHS Pension Scheme and, within that, only available to clinicians.
However, publication of the consultation is likely to see calls for this flexibility to be extended elsewhere within the public sector, where the same problem exists to varying extents across many Government bodies. It may also lead to pressure for general reform not just of the Annual Allowance taper for high earners but also of the anomalies and unintended outcomes that exist across the wider pensions tax regime, including the Lifetime Allowance (which limits the tax-favoured pension saving individuals can make over the course of their careers).
This is a problem that has been brewing for a number of years and there is no easy solution as two regimes come head to head - either the pensions taxation system needs to be simplified or public service pensions schemes need to become more flexible. There are significant wider challenges with both, but on balance we believe this problem can be resolved through the schemes themselves. Good communication and engagement with those affected is very important.
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