Doctors to benefit from end to ‘pension trap’
By Gemma Raw
Chancellor Jeremy Hunt’s decision to boost annual pension allowances and abolish the lifetime allowance has been welcomed by many NHS doctors, whose retirement planning has been negatively influenced by years of tax cuts and freezes.
On 6 April 2023, the tax-free annual allowance for pensions was increased from £40,000 to £60,000, the taper for higher earners was increased from £4,000 to £10,000 and the lifetime allowance was scrapped entirely.
These changes come after years of campaigning by the British Medical Association (BMA), as well as other organisations representing those in senior healthcare roles, such as the Hospital Consultants and Specialists Association (HCSA). They mean that many senior doctors should no longer be disproportionately impacted by tax rules which apply to the benefits accrued in their NHS pension pots.
What are the annual and lifetime allowances?
Everyone is allowed to save for retirement out of untaxed income. Relief is applied (in the form of rebates) at the relevant income tax rate of 20%, 40% or 45%. The Annual Allowance is a yearly limit on tax-free saving within a pension and the standard annual allowance is tapered down for the highest earners. In addition, prior to April this year, there was also a lifetime allowance. This was the total amount you could build up in all your pension savings without being liable for a tax charge.
Why are the changes to allowances so important for doctors?
In a defined benefit (DB) pension scheme such as the NHS one, the annual allowance is applied to growth in benefits, rather than contributions. Over the years allowances have been reduced or frozen and this has had a major impact on many doctors, who have found themselves breaching the allowances and incurring tax charges, simply by working full time.
As a result, many senior doctors have been reducing their hours or taking early retirement, contributing to NHS workforce pressures. Research by the Hospital Consultants and Specialists Association (HCSA), carried out before the changes announced in the government’s recent budget, showed that one in 12 senior doctors wanted to work fewer hours for pensions taxation reasons and one in 16 had already made definite plans to leave the service due to pensions tax.
“The rise in the annual allowance will mean far fewer doctors will receive large punitive pension tax bills and will significantly reduce the perverse incentive to reduce hours due to pension tax,” commented BMA pensions committee and consultants committee chair Vish Sharma. “It’s also very welcome the government has committed to addressing the anomaly of ignoring any negative pension growth and rectifying this will ensure NHS staff can appropriately utilise their full annual allowance.”
