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NHS and the pensions 'crisis'

Martin O'Gorman, VitalityInvest Pensions Technical Analyst

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The implementation of the Pensions Simplification legislation in 2006 was intended to do exactly what it said on the tin – simplify pensions. The problem comes when subsequent changes are layered on top of each other to satisfy what are short term policy objectives to the extent that the core underlying objective is, arguably, lost. 

Changes to the way tax relief is applied to pensions is a key example of this. The fluctuation of the annual allowance and the application of pension input periods are both examples of constant tinkering both of which may have resulted in unintended consequences for pension savers. However, the introduction of the tapered annual allowance has had possibly the biggest unforeseen impact with its effect on the NHS pension scheme membership.

The NHS pension scheme

There has been extensive focus around the crisis facing the NHS and the availability of doctors to support the demand for their expertise. From a doctor’s point of view undertaking additional overtime hours means they are actually worse off due to the impact of the tapered annual allowance. The fundamental problem is that overtime is not pensionable for doctors and consultants, however, as a result of the additional earnings the risk that the taper kicks in means that not only are they not accruing pension but are faced with extra tax charges due to the complexity of the NHS scheme.

The NHS scheme has a number of different parts to it. Early variants of the scheme – the 1995 section and 2008 section – are both final salary arrangements. There is also a 2015 element that works on a career average earnings basis providing a pension of 1/54th of average earnings for each year of service. Members within 10 years of their normal pension age were able to remain in the 1995 or 2008 version of the scheme until they retired but it is possible for NHS staff to have benefits under more than one section of the scheme. 

Given that some members could easily have benefits under multiple sections it becomes all the more difficult to predict the impact of the annual allowance in a given year. What further complicates the ability to undertake effective pension planning is the absence of future projections under the 2015 section of the scheme where the NHS are not keen to speculate on the likely level of future benefits. As the annual allowance and the taper both operate on a current year basis it does require a degree of predictability of the benefits accruing to assess the impact. For doctors this becomes all the more difficult since they are not easily able to predict total earnings for the coming year when additional overtime and consultancy work will impact income for the taper calculation.


The net effect is that doctors are working reduced hours, retiring earlier than they might otherwise have done so and declining to undertake additional hours. Consequently, the pension problem has now become a much wider problem than a need to limit tax relief for high earners. The Treasury is unlikely to look at wholesale changes to the way the taper works due to the fact that it only impacts around 1% of taxpayers. 
A proposal to introduce a 50:50 arrangement where doctors can accrue a lower level of benefit for reduced inputs may still need further work with the British Medical Association suggesting it would still mean doctors are not taking on additional work. 

There are other possible options – a flexible opt out out/opt in arrangement is one potential solution, another being a cap on pensionable pay. In any event the way the taper impacts on this particular sector, is something the government does need to consider in more depth, particularly as a key Civil Servants Trade Union has also now raised a similar concern around this issue for its membership. The Treasury is undertaking a review of the impact of the taper on public sector employees as a result of the doctor’s campaign but as yet there is no immediate solution to this problem.

VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority. 05/09/2019 | This article’s view is based on the law, practices and conditions as at the day of publication. While we have made every effort to ensure they are accurate, we accept no responsibility for our interpretation or any future changes. | VI NL 0006