Has the Chancellor finally solved the NHS pensions problem?

The pensions taxation changes announced in the Budget along with previously announced flexibilities and scheme amendments go a long way to resolving the problems.

Jeremy Hunt announced dramatic changes to pensions taxation in his 15 March 2023 Budget. His apparent motive was to help the senior NHS workforce – preventing them from retiring early or working less due to the disincentives created by annual and lifetime allowance (LTA) charges. The Chancellor, however, decided to extend the tax benefits to everyone and, by abolishing the LTA entirely, went much further than anyone expected or was necessary than required to solve the problem.

The Labour party have instantly hit back with a commitment to reverse the LTA changes but, crucially, they have singled out NHS workers as an exception. We will have to see exactly what they mean in terms of that and now focus on the immediate changes.

Higher earning NHS consultants and GPs have been hit with the double whammy of both regular annual allowance charges and the prospect of LTA charges when they come to take their benefits.

Clearly, the abolition of the LTA resolves one of these issues entirely. They can now build up as much pension as possible without fear of an LTA charge. The change removes a significant disincentive to continue working.

However, the annual allowance was always the bigger issue. The increase from £40,000 to £60,000 will definitely help with the problem and ensures many consultants and GPs will not have to face regular annual allowance charges. There are still likely to be spikes in pensions inputs about the annual limit caused by the NHS pay scales and whenever they take on additional pensionable responsibilities. The higher annual allowance coupled with, as time goes by, potentially more carry forward available, should, however, mean that annual allowance excesses are far less frequent. To breach the £60,000 annual allowance in a defined benefit scheme would mean an above inflation pension increase of over £3,750 in a year, which is a considerable sum to accumulate with the full tax advantages.

For very high earners there is still the issue of tapering. However, the increase in the Adjusted Income limit will move more NHS workers out of scope. Everyone will have a higher annual allowance with the increase in the minimum tapered annual allowance to £10,000 if adjusted income reaches £360,000 or more. Many NHS workers in this bracket are likely to have an element of private earnings and in many cases can control their level of taxable income by using limited companies to perform their private duties.

In addition to the changes announced in the Budget we have also recently seen new retirement flexibilities confirmed and technical changes to resolve some pension input issues caused by inflation. These are covered in detail in our recent Bulletin.

The ability to take pension benefits from the 1995 section of the scheme at age 60 and continue to accrue benefits in the 2015 scheme without fear of an LTA charge really should provide a great incentive for doctors to avoid retiring at 60. Whether the tax benefits in themselves are enough to keep the workforce motivated and working when, in many cases, they will already have a comfortable pension built up is another question.

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