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

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.

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.