NHS Pension Scheme: Tapered Annual Allowance

Julian Knight Excerpts

Tuesday 2nd April 2019 Westminster Hall

[Paul Masterton]

I thank the hon. Gentleman for raising another specific case. I hope the Minister will bear in mind the added weight of evidence.

Another of my constituents, who has worked as an NHS constituent for 14 years at the Queen Elizabeth University Hospital in Glasgow told me that he is employed on a 40-hour per week full-time contract and provides eight hours per week of additional clinical work, making 48 hours in total. He does not do any private practice outside the NHS, but he was hit with an unexpected bill of nearly £17,000 as a result of the tapered annual allowance. The only way the consultant can avoid those charges is to reduce his income below the various thresholds, and the only way he can reduce his income is to reduce the amount of work he does for the NHS. He has told me that he has no desire to do that and would happily volunteer to do extra work occasionally at weekends to tackle waiting lists or fill gaps in the service, but the tax implications make that impossible and he has already stopped doing any extra work.

Another consultant from East Renfrewshire with 16 years’ experience—eight as a consultant—told me that he was actively declining extra work to support stretched services in order to avoid the tax penalties. That means that he does not apply for the discretionary points that are awarded for additional work that is taken on above the normal daily remit, such as developing new services, research and teaching. As the hon. Member for Glasgow North East (Mr Sweeney) said, that impacts not just on the daily running of services, but on the development of a culture of excellence within the NHS.

[Julian Knight (Solihull) (Con)]

I apologise for missing the first couple of minutes of the debate. My hon. Friend is a great thinker on pensions, which is the main reason I wanted to come here today, and I want to ask him a very simple question. Does he wish to dispense with the annual allowance and lifetime limit, or does he want a special dispensation for senior NHS workers, who are quite high-income earners?

[Paul Masterton]

I thank my hon. Friend for his kind comments, which are undeserved. There is a wider issue of the general complexity of the systems of reliefs and allowances in the UK pensions system. I hope not that there will be one single dispensation for one area of the public sector, but that we start to recognise that we need to look at the way the system is operating more generally and to work out whether some of the allowances and reliefs are actually necessary or effective, and whether they should be subject to a broader review.

A recent report showed that over 50% of respondents reported using the NHS “scheme pays” facility to pay off their unexpected tax charges. However, this does not work for all cases, and the amount is effectively treated as a loan that is then paid back from the retirement benefit, with interest charged against the pension at high rates. That means it is usually costlier than paying up front, particularly for younger members. I fear that this issue could see us sleepwalk into a deepening workforce crisis in the NHS and result in consultants leaving the NHS early, even though they still have the skills and experience we need. Those individuals are important not just for patients, but for junior doctors in terms of the training and mentoring they receive on the job.

The British Medical Association firmly believes that long-term changes to the pensions taxation system are required in order to remove the disincentives that exist, and I certainly agree. The Library’s excellent briefing on pensions taxation makes reference to the impact of changes in the annual allowance on the public sector, and notes that the 2017 report of the Doctors and Dentists Review Body requested more evidence about the impact of the annual and lifetime allowance on early departure rates. The Treasury indicated that it would consider revisions to the NHS pension scheme if there was evidence that the number of doctors and dentists taking early retirement as a result of its inflexibility was substantial.

I want to ask the Minister a series of questions, and I appreciate that she might not be able to cover them all today. A number of them fall within the remit of the Treasury, but hopefully she will be able to take those away and arrange for either herself or a Treasury Minister to get back to me. First, what discussions did the Treasury have with the Department of Health and Social Care when the tapered annual allowance was introduced, and was this ever flagged as a potential problem? Secondly, what evidence has the Treasury collected on the numbers of doctors and dentists taking early retirement, following the 2017 report? If the answer is none, why is that the case and when will analysis be carried out of the impact on changes to the lifetime and annual allowances on the NHS? If evidence has been collected, what were the findings of that analysis, and are any changes being considered?

Thirdly, what consideration has the Treasury given to a review of the annual allowance taper more generally, perhaps as part of a wider review into simplifying the incredibly complex system of reliefs and allowances in the UK pensions system? Finally, have the relevant Government Departments had any discussions with the relevant parties on whether permitting more individual flexibility in the NHS pension scheme could be a solution? That is something that NHS Employers is calling for. This issue is not specific to the NHS—I have heard in recent days from armed forces personnel—but it does appear to be an area with a particular problem.

Although I appreciate that many people will not hold great swathes of sympathy for individuals on such high earnings who will still receive high levels of retirement pension that most of our constituents can only dream of, the reality is that if this results in consultants with much-needed expertise turning down work or leaving the NHS altogether, it will have major implications for the provision of services and the quality of care our constituents receive right across the UK, whichever colour of Government is in control of their NHS.

I am sure that the Treasury did not intend these changes to force experienced and committed consultants, surgeons and GPs to do less work for the NHS, but this is the reality being faced in the hospitals that serve my constituents and the Minister’s. It is good that the British Medical Association and NHS Employers recognise that this is a serious concern and met last week to discuss it, but they have not agreed a solution or a joint action plan. In reality, the ball is in the Treasury’s court.

I absolutely respect and agree with the Government’s position that we need to get the balance right between encouraging saving and managing Government finances, but this issue cannot be easily ignored. Legitimate aims to restrict tax perks for the wealthiest in society are exposing ever increasing numbers of long-serving and highly experienced NHS workers to massive tax charges. If we want high quality care in the NHS in Scotland and across the UK, we need senior doctors who have devoted their professional lives to the care and wellbeing of our constituents. It is ludicrous for us to face a situation in which the pensions system is acting as a disincentive and effectively forcing consultants to choose between working for nothing and affecting patient care.

I hope that this debate provides the first opportunity for us to say clearly that, whether the answer lies in adding flexibility to strict NHS pay and pension terms or with the Treasury using this as a reason to take a fresh look at the ridiculously complicated tapered annual allowance, this is an unintended consequence of the UK’s complex pension regime, which we need to sort out quickly to let those consultants get back to work.

[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.