Doctors’ pensions - when 50% of something is better than 0% of nothing

Moira Warner 25 July 2019

Moira Warner, Senior Business Development Manager, examines the Government proposal for a 50:50 pension option for NHS doctors and how it could work in practice.

The first half of 2019 has seen lots of press coverage about the impact of the tapered annual allowance (AA) on doctors.

Views on whether doctors should receive special tax treatment continue to vary. We believe the tapered AA should be abandoned altogether - there are cleaner and clearer ways of restricting pensions tax relief for higher earners. But calls to remove this unpopular and confusing limit have so far fallen on deaf ears. Instead, the Chancellor’s looking to introduce greater flexibility to the NHS pension scheme to solve the current doctors’ crisis.

What’s the proposal?

On Monday 3 June, the Government announced what this greater flexibility should look like. It’ll consult on a ’pay half to get half’ option known as a 50:50 plan. This means members will pay half the standard contribution rate and in exchange, they’ll build up benefits at half the rate. While any flexibility to help ease the unwanted consequences of the current situation is welcome, 50:50 is no miracle cure. Firstly, it’ll require doctors to be able to proactively model the impact of both standard and 50:50 membership in advance –which isn’t always possible. Secondly, because pension contributions are excluded from the definition of threshold income (TI), a 50% contribution may actually increase TI, resulting in a less compelling outcome than doctors may expect.

As is always the case with headline proposals, there are a range of issues which aren’t yet clear. These include:

Whether access to the 50:50 plan will be limited to certain classes of employee. The Interim NHS people plan containing the proposals say that the “proposal would give senior clinicians the option to halve the rate at which their NHS pension grows in exchange for halving their contributions to the scheme”. We take the view that this new flexibility, if introduced, shouldn’t be limited to “senior clinicians”, but should also be available to the high number of modestly paid nurses who are leaving the pension scheme because of affordability concerns. The option for nurses to pay pension contributions at a reduced rate might encourage more of them to stay in the pension scheme and might ultimately help the Government with the retention and recruitment issues they’re keen to address.
Whether members opted into the 50:50 plan will have the same right to death in service or ill-health benefits as ‘full’ members do. This is the case under a similar option within the Local Government Pension Scheme for 50:50 members.
Whether the option will be available under all NHS schemes/sections or whether it’ll only apply to career average members. Senior clinicians may be continuing final salary members of the 1995 or 2008 section of the scheme under transitional protections introduced during scheme reform. Unless the Government’s prepared to amend the regulations applicable to all 3 sections of the NHS scheme, this solution will only partially address the problem.

We’ve said that 50:50 may not always be as good an option as members might think, so analysis would be needed on a case by case basis. We’ve gone one step further in the case study below. It shows how the numbers might stack up for a typical hospital clinician under a 50:50 plan, compared to full membership and declining overtime work.

Meet Ursula

Ursula’s a 50 year old Anaesthetist in Leeds with a pensionable pay of £127,000 a year as at 31 March 2019.
She’s been building up benefits under the NHS career average scheme since 1 April 2015 and has 15 years’ pre April 15 final salary benefits in the NHS 1995 section. As long as she has no break in service of more than five years, the latter remain linked to her final salary when she retires.
Her contributions to the scheme are 14.5% of pensionable salary. In 2019/20 she expects to earn an additional £8,000 in non-pensionable overtime.
She receives a salary award of £3,810 on 1 April 2019. As she has no carry forward available, she’s concerned that the impact of the tapered annual allowance means she should leave the NHS scheme.

Ursula plans to retire in 10 years’ time at age 60 when she’ll be able to take her 1995 section benefits without actuarial reduction. She’s not sure whether she’ll take her career average benefits at the same time (in which case they’ll be actuarially reduced for early payment) or at a later date.

The table below summarises the outcome of our analysis shown as the overall benefit to Ursula against her costs. For the 50:50 plan, we’ve assumed that Ursula pays 50% of the standard NHS contribution and receives 50% growth in her career average benefits in return. We’ve assumed her preserved final salary benefits are unaffected by this election and remain linked to the salaries she earns in the career average scheme.

What are her options?

	Option 1 Hypothetical 50:50 plan	Option 2 Full contribution	Option 3 Stay in scheme on full contribution but decline overtime
Ursula’s costs (tax charge + gross contribution)	£9,484	£24,140	£22,540
Additional built up benefits	Pension = £2,356 Lump sum = £2,143	Pension = £3,615 Lump sum = £2,143	Pension = £3,615 Lump sum = £2,143 BUT £8000 less taxable income
Estimated gross value of additional pension over 20 year retirement	£89,445	£137,249	£137,249
Gross costs as a proportion of estimated total gross benefits	10.6%	17.6%	21.2%

In Ursula’s case the 50/50 plan looks like a reasonable option. But analysis will be needed in any particular case.

Our updated adviser policy paper

We’ve issued an update to our adviser policy paper “Why paying a tax charge isn’t always a bad thing”. It contains the detailed numbers for our case study and more information about options for doctors and giving advice in this space.

About the author

Moira spent the early part of her career with a number of European investment banks both here in the UK and overseas with responsibility for sales of money market securities and fixed income products to institutional and Central Bank clients. In the early noughties she moved to the life insurance sector where she has held various pensions technical roles supporting both provider, product and proposition/ sales. Moira specialises in Public Sector pensions and worked closely with a number of key Public service pension schemes and the Local Government Association to help ensure the compliant overlay of pension freedoms on scheme regulations and practices. Moira moved to Royal London in August 2018 and is involved in developing adviser facing content, writing articles and commenting for the press. At weekends Moira can usually be found working in her garden but she doesn’t let her passion for plants prevent her from also indulging in her love of travel.