Two quite separate developments in pension legislation will have major repercussions for high earners in the NHS, including doctors, surgeons and consultants.
The first is a change in the Finance Bill 2021 affecting the Lifetime Allowance, which sets a cap on how much you can save into your pension, with tax relief, over your lifetime.
The Lifetime Allowance is currently £1.0731 million. Normally, this would be linked to the Consumer Prices Index (CPI) rate of inflation so that it increases every year.
UK Government ministers have now removed that link, freezing the allowance for the next five fiscal years until 2026.
This change particularly affects those close to the end of their working life, with retirement on the not-so-distant horizon, whose pension savings run the risk of exceeding the limit in these final years.
The problem is these excess savings mean heavy tax penalties. You will pay 25% tax on excess you take as a pension, or 55% if you take it as a lump sum. This is designed to claw back the tax relief you receive on those savings.
‘Punitive tax bills’
At Anderson Anderson & Brown Wealth (AAB Wealth), we are already seeing evidence that many medical and other professionals are reducing their hours, or even retiring earlier than they would like to, in order to avoid such punitive tax bills.
We have also been tracking a second, separate issue muddying the waters around the future of pension savings for surgeons, doctors, consultants, and indeed all NHS and public sector workers.
Complex legislation on pensions has imposed new regulations for those in public sector schemes, by redrawing the thresholds between different age groups and how their pension savings are treated.
In the case of the NHS pension, it is divided into three sections and in each the benefits of savings are calculated differently.
In the past this meant two people born two years apart could receive quite different treatment, based on age.
‘Play the long game and hold your nerve to win rewards’
The Circuit Court, taking two particular public sector pension schemes as test cases (judges and firefighters), declared these rules constituted age discrimination and should be reformed.
Taking its name from the judges’ pension scheme, this is now commonly known as the McCloud judgement.
The government agreed with the ruling, which would have affected only the two schemes named above, but decided to apply the spirit of the judgement more broadly and declared that all public sector schemes would be reformed.
This is good news, of course, but it does leave NHS and other public sector workers “saving blind”, while the health service reviews its scheme to construct a new and fairer system.
NHS workers, meanwhile, are confused as they do not know what the detailed outcome of this review will be.
All they have been told is the NHS is targeting October 2023 as the date by which they will get some clarity on benefits.
Andrew Dines is a director and chartered financial planner at AAB Wealth.