NHS Pension Scheme: Tapered Annual Allowance

Debate between Julian Knight and Jackie Doyle-Price

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.