Royal London has called for the removal of tapered annual allowance in a bid to fix problems between doctors and their pension scheme.

With growing reports of senior NHS staff cutting their hours or even retiring because of pension tax issues, Royal London has published a new policy paper explaining the issue and reviewing the various solutions on offer.

One doctor spoken to by Royal London in preparation of this report said that action was needed “so that consultants can go back to talking about patients rather than pensions”.

Others pointed out that NHS ‘waiting time initiatives’ to drive down patient waits were being undermined by the effects of the pension tax regime.

Doctors reported inventing ‘DIY’ solutions to these issues including what has become known as the ‘hokey-cokey’ approach, involving being a member of the NHS pension scheme for one month, opting out for eleven and then repeating the process again the next year in order to avoid big tax bills.

Royal London argues that the best solution would be to remove a complex and unpredictable feature of the tax system – the tapered annual allowance – even if this required a reduction in the overall annual allowance.

Commenting on the issue, Steve Webb, director of policy at Royal London, said: “It is utterly absurd that doctors are having to consider their pension tax position before deciding whether or not to take on an additional shift or cover for an absent colleague.

The NHS is structured around senior clinicians taking on additional roles and responsibilities and this whole culture is being undermined by a bewildering system of pension tax relief. Rather than tinkering with the NHS pension scheme, the Treasury should abolish the ludicrous and capricious system of tapering annual allowances for tax relief. Patient care must not continue to suffer on the altar of Treasury intransigence”.

The new policy paper entitled “Finding the right medicine – solving the problems between doctors and their pension schemes” begin by explaining the current system of pension tax relief, including the system of ‘tapering’ annual limits on contributions for those on higher incomes. It points out that the system contains an unwelcome ‘cliff edge’ whereby a small amount of extra earnings can trigger a large tax bill.

Next, the paper reviews options for reforming the NHS pension scheme, noting that other schemes such as the Local Government Pension Scheme (LGPS) and the Universities Superannuation Scheme have been swifter to offer new flexibilities to members.

LGPS now offers members the chance of a 50-50 arrangement where they can pay half contributions for half benefits. This would reduce, but not eliminate, the problems faced by some doctors.

However, the policy paper insists that none of these changes would deal with the underlying problem of a highly complex and unpredictable tax regime.

The paper therefore looks at the wider system of pension tax relief and at potential reforms which could be brought in relatively quickly to address this issue. It notes that the tapering of the annual allowance does not just affect doctors but also affects self-employed people, those receiving bonuses, and anyone else whose annual income is unpredictable.

The paper concludes that reform of the tapered annual allowance would not go far enough and that outright abolition is required. If the Treasury decided that it did not want the overall cost of tax relief to increase, the paper notes that a simple across-the-board reduction in maximum limits on annual contributions would probably be required.

Commenting on the issue, Scott Gallacher, chartered financial planner for Leicester-based Rowley Turton, said: “We act for a number of medical professionals and I agree with Royal London that the current pension rules are creating issues. It’s actually a key reason that many medical professionals have decided to leave the NHS or retire.

“It’s not the tapered annual allowance on its own that creates the real problem but the £110,000 ‘threshold income’ limit that triggers it.

“For example, a doctor earning £109,999 avoids the tapered annual allowance issue entirely. However, if that doctor then works an extra or two session -pushing their earnings over £110,000- they can be subject to the tapered annual allowance. The extra earnings can result in a substantial tax charge and doctors could a five-figure tax charge on just £1 of extra earnings.

“Any situation that creates tax rates in excess of 100% is clearly unfair and need addressing urgently. Though we need to remember it’s not just doctors affected by this.”

Aamina Zafar is one of the UK’s leading financial journalists. She has previously worked as a senior reporter at FT’s Financial Adviser. The award-winning journalist writes regularly on the IFA community, mortgages, pensions and financial regulation.

Further reading on this topic:

Lack of knowledge to blame for eye-watering number of NHS Pension opt-outs