How unfair pension tax charges are causing havoc in the NHS
In April 2006 so-called pensions simplification was introduced by the then Chancellor of the Exchequer, Gordon Brown, under the Labour government of Tony Blair. Unfortunately, the changes introduced to pensions were anything but simple. It may as well have been called pensions complication.
Amongst the measures introduced were two allowances known as the Lifetime Allowance, LTA, and the Annual Allowance, AA. The LTA was a cap on the size of your pension above which punitive tax charges would apply. The AA was set as a maximum annual contribution limit for tax relief. At the time it didn’t seem so bad because the LTA was set at £1.5 million and the AA at £256K per annum so it appeared that such limits would only really affect the so-called “fat cats.” These limits were purportedly introduced to stop directors of large PLCs, especially the banks, from awarding themselves huge pensions.
Unfortunately, since their introduction the maximum limits have been curtailed quite a lot, ironically by successive Tory governments, resulting in a current Lifetime Allowance of £1,055,000 and an Annual Allowance of £10,000-£40,000 depending on the level of your income.
I have always questioned why the government introduced both a cap on the size of your pension and the annual contributions. Surely only one limit is needed? Previously there was only a limit on your contributions. By having a cap on the size of your pension fund you are effectively penalising people for saving money into pensions and managing their pensions well.
Of course, VIPs such as the Prime Minister, the Chancellor of the Exchequer and the Speaker of the House of Commons are exempt from these tax charges, as are judges. This is of course outrageous and an affront to so-called democracy. Members of Parliament already receive Civil Service Pensions that are twice as generous as ordinary Civil Servants. Yes, that’s right. An ordinary Civil Servant has to work 40 years to earn the maximum Civil Service pension which is of course gold-plated as it is guaranteed by the government, well the public purse actually. MPs earn the maximum Civil Service pension after just 20 years’ service. Yes, you are reading that sentence correctly!
The Prime Minister’s pension nest is the most feathered one of all. He or she is like the Queen Bee of the bee hive. You see the Prime Minister not only receives the maximum Civil Service pension after 20 years’ service as an MP but also earns a second full pension, equivalent to 40 years’ service for an ordinary Civil Servant on top of the already generous pension he or she has already earned as an MP, no matter how long he or she serves as Prime Minister. On top of this, the PM isn’t affected by the high taxes imposed by the Lifetime Allowance. Is this not a scandal?
At the time of writing it seems likely that at least the Annual Allowance limit will be removed for the higher paid consultants and doctors in the NHS and probably widened to include all higher paid public-sector workers. However, this would be highly unfair on higher paid private sector staff as it would be discriminatory and would hit the wealth-makers of society.
Lots of NHS consultants and doctors are retiring early because of the impact of high taxation on their NHS pensions which make it unviable for them to continue working. So there is becoming a brain drain from the NHS. If ever there were a case of the law of unintended consequences, this is it. You really couldn’t make this sort of stuff up.
The LTA is bad enough. If your pension pot exceeds £1,055,000 you will pay Income Tax at a rate of 55% on lump sums withdrawn in excess of the limit and an additional 25% on any income taken on the excess too. When these penal tax rates were introduced in 2006 they were in effect retrospective because there was no exemption for pensions earned before 6 April 2006. Yet another scandal.
The Annual Allowance was further reduced by the then Chancellor, George Osborne, in 2016 when he introduced the so-called tapered Annual Allowance. This was created in order to reduce tax relief on pension contributions by higher earners. So, if you earn more than £150K a year your Annual Allowance, or AA, reduces by £1 for every £2 you earn above £150K p.a. until your earnings reach £210,000 at which point your AA will be reduced from £40K to £10K p.a. George Osborne was very bold, bearing in mind he knew his pension would never be caught by these new rules. To think that we criticise dictators in lesser developed countries for lining their own pockets, yet our own leaders do exactly the same but in a much sneakier manner!
Well the problem with the Tapered Annual Allowance is that it is hitting doctors and consultants in the NHS in the pocket. In some cases, doctors have been facing marginal tax rates of more than 100% meaning they were working for nothing for some of the hours they put in each week. As a result, quite naturally, many of these doctors and consultants have reduced their hours to avoid the tax trap and many of them are retiring early. Result – a large shortage of doctors and consultants in the NHS. This is hardly surprising, but you tell that to the politicians and Civil Servants who create these regulations.
The good news is that you can reduce the effects of both the LTA and AA if you plan properly and in advance. How do you do that? Well you speak to a pensions specialist first of course.
So, if you would like advice on how to minimise the impact of both Lifetime Allowance and Annual Allowance tax charges why not get in touch with us? You know it makes sense.