NHS Pension Scheme: Tapered Annual Allowance

Jackie Doyle-Price Excerpts

Tuesday 2nd April 2019 Westminster Hall

[The Parliamentary Under-Secretary of State for Health and Social Care (Jackie Doyle-Price)]

It is a pleasure to serve under your chairmanship, Sir Roger. I thank my hon. Friend the Member for East Renfrewshire (Paul Masterton) for securing the debate; he made a characteristically thoughtful contribution.

We are the custodians of taxpayers’ money and need to manage the country’s finances in a way that gives value for money and allows us to live within our means. We also need to accept that when we make changes to the tax system, it changes people’s behaviour. I am grateful for the opportunity to look at these issues through the prism of the impact on the workforce in the national health service.

As my hon. Friend said, the annual allowance is a fiscal measure that operates across all pension schemes in both the public and private sectors. Alongside the lifetime allowance, the Government keep this measure under review to ensure that the benefit of tax relief on pension scheme contributions remains affordable. It is in fact one of the most expensive tax reliefs in the personal tax system. In 2015-16, income tax relief and employer national insurance contributions relief cost the Exchequer around £50 billion, with around two thirds going to higher-rate taxpayers. That is an important point to bear in mind, because we need to ensure that our tax system is progressive and managed efficiently. We will want to look at tax reliefs that favour the highest-rate taxpayers to ensure that our overall burden of tax is appropriate.

The reforms made to the lifetime and annual allowances in the previous two Parliaments are expected to save over £6 billion a year, and are necessary to deliver a fair system and to protect public finances. To ensure that the benefit the wealthiest pension savers receive is not disproportionate to that of other pension savers, the Government restrict the amount of tax relief available. The annual allowance does not taper below £10,000, and fewer than 1% of pension savers will have to reduce their saving or face an annual allowance charge because of this policy.

[Julian Knight]

Does the Minister agree that a potential issue is that this acts as a cap on the amount of tax relief that is given out? We know that this is not progressive in terms of higher-rate tax relief on pensions. Would it not be better for us to look at a system in which we have a flat rate of 25p, 28p or 30p in the pound, rather than the higher rate? That would mitigate, or mean that we did not need, those lifetime and annual allowances?

[Jackie Doyle-Price]

I shall not stray into policy that is not mine and that belongs to Her Majesty’s Treasury—that is a very convenient way for me to duck the issue. It comes back to the point that the moment we start to introduce complexity into our tax and allowance system, it brings perverse incentives. The overall goal in recent years has been to bring our public finances back into kilter, having had excessive deficits. It is only natural that the Exchequer looks at where reliefs that are funded by the state are going to higher-rate taxpayers. That is where we have got to with regard to the impact on public sector pension schemes, which by their nature are as we describe.

The NHS pension scheme is a generous and valuable part of staff reward packages, and is one of the best schemes available, notwithstanding the issues raised by my hon. Friend the Member for East Renfrewshire. It is right and proper for all hard-working NHS staff to expect financial security in retirement after dedicating a lifelong career to looking after the nation’s health.

For some senior clinicians, the generosity of the scheme, combined with their comparatively high levels of pay, means that their pensions build up to a level that breaches tax limits. Both the annual and lifetime allowances encourage pension growth at a steadier rate that is more aligned with typical pension growth experienced across the general population. To illustrate that, under the 1995 section of the NHS pension scheme, members who accumulate pension benefits worth near the £1 million lifetime allowance will have built up a pension of around £46,000 a year, plus a tax-free lump sum of £138,000 on retirement. Pensions of that size provide substantial financial security in retirement, and it is right that the Government take steps to limit the tax incentive to save further.

My hon. Friend raised concerns about the impact on our NHS workforce. With respect to discussions between the Treasury and the Department on the introduction of the allowance, the 2015 manifesto committed to

“reducing the tax relief on pension contributions for people earning more than £150,000.”

That was a manifesto commitment we had to deliver. The tapered annual allowance fulfils that commitment and applies to all contributors to pensions, in both the public and private sectors. The impacts of the change, including on the public sector, were carefully considered at the time.

My hon. Friend asked about the number of doctors and dentists taking early retirement. Data from the NHS pension scheme administrator shows that 494, 490 and 424 hospital doctors took voluntary early retirement in the financial years ending 2016, 2017 and 2018 respectively. Those early retirements represented approximately a third of all hospital doctor retirements in those years. With respect to GPs, in 2016, 695 took early retirement; in 2017, 721 took early retirement; and in 2018, 588 took early retirement. Those figures represented more than half of all GP retirements in those financial years. With respect to dentists, 145 retired early in 2016, followed by 143 and 115 in 2017 and 2018 respectively. Those retirements represented approximately 40% of dental practitioner retirements in those years. There is clearly an impact on the behaviour of practitioners.

My hon. Friend asked what consideration the Treasury has given to a general review of the annual allowance taper and the broader system of reliefs in relation to pension saving. Those are matters for the Chancellor, and the Government will continue to review all aspects of pensions policy, in line with our annual assessment of the public finances.

[Jonathan Edwards]

I am grateful to the Minister for giving way. She is highlighting some of the concerns that have been expressed about the unintended consequence of a capacity problem for the NHS as a result of the changes to pension relief. Given that health is a devolved issue in Wales, have the British Government received any communication from the Welsh Government expressing concern about the changes?

[Jackie Doyle-Price]

I have not, but this is about the impact of the pension and tax regime on the sector. I am not aware of any conversations with the Treasury, but if the hon. Gentleman has concerns, I encourage him to make representations. There are always unintended consequences with any policy, and we always need to challenge the operation of our policies to make sure they are in the right place and to decide whether they need to be refined, tweaked or changed in any way.

The Government recognise that pension tax considerations will contribute to decisions by some senior clinicians to retire early or to reduce their NHS commitments. For those who wish to remain in the NHS pension scheme, the annual allowance is a disincentive to take on additional work and responsibilities —that is very clear. The extra income increases the impact of the tapered annual allowance.

Some clinicians may judge that a reduction in their current NHS commitments, while maintaining scheme membership, better serves their financial interests. Employers tell us that the reduction in service capacity can be difficult and that capacity is expensive to replace. I assure my hon. Friend that the Government are listening carefully to the concerns raised by senior doctors and NHS employers about the impact of the tapered annual allowance.

That doctors may seek to limit or reduce their NHS commitments is of concern to Ministers, and something on which we are keeping a close eye. Maximising the participation of our clinical workforce is clearly essential to the delivery of our ambitions for the NHS. The quality and quantity of our workforce is always an important factor in the extent of the delivery of our objectives.

As an immediate step, the Department has sought to make available to NHS pension scheme members all possible flexibility under Her Majesty’s Revenue and Customs legislation and the current fiscal framework for public sector pension schemes. The BMA asked that we extend the scope of the voluntary “scheme pays” facility—implemented by the NHS pension scheme—to cover the payment of tax charges from breaches of the tapered annual allowance.

We have done that, but we have also gone further. The NHS pension scheme’s voluntary “scheme pays” facility has also been extended to cover tax charges of less than £2,000, which means that, from tax year 2017-18, a member can elect for the scheme to pay 100% of their annual allowance charge to HMRC on their behalf. The “scheme pays” facility allows individuals to settle their tax charge without needing to find funds up front, but HMRC requires an adjustment to the benefits accrued by members if a defined benefit pension scheme pays an annual allowance charge. That adjustment must be just and reasonable, and with regard to normal actuarial practice.

Accordingly, the NHS pension scheme applies an interest rate to the charge paid on the member’s behalf. That charge is deducted from the capitalised value of the pension at retirement, with the interest rate set at the scheme discount rate. I recognise that, for some younger clinicians with many years before retirement, the compounding effect might influence the attractiveness of “scheme pays”, so I encourage members of the pension scheme to seek formal financial advice.

The Government will look at potential further measures. There is clearly considerable interest in this matter, and I assure hon. Members that we keep the impact of public sector pay and pensions policies under constant review, and take account of total reward and fiscal considerations. As my hon. Friend recognises, the issue is complex, and it is difficult for the Government to strike the right balance among competing interests. I do not think, however, that there is a case for exempting high-earning NHS staff, such as GPs and consultants, from a tax measure that is intended to apply to high-earning individuals. I also doubt that clinicians necessarily expect to be treated differently from other taxpayers.

The fiscal framework within which the NHS pension scheme operates is an important consideration. The NHS pension scheme, like most public service pension schemes, does not manage a fund of assets out of which pensions are paid. It is instead financed on a pay-as-you-go basis similar to that of the state pension, with contribution income defraying the cost of pensions in payment. Any change to scheme rules that provides flexibility could therefore have a significant effect on contribution income. That would have an impact on the Exchequer. We must balance that fiscal risk against the benefits of providing additional flexibility. Any proposed pension flexibility would be a matter for the Chancellor.

Clearly, this is a complex subject that we will have to keep under review in recognition of the fact that it drives behaviour in the NHS in a way that could cause us difficulties in the delivery of our overall commitments. We clearly want to retain the best, most qualified and expert staff in the NHS, and we need to be vigilant to ensure that our tax and pension benefits system does not stand in the way of delivering the best possible NHS.

Question put and agreed to.