Claire Trott: Has Hunt solved the NHS issues?

Chancellor Jeremy Hunt announced dramatic changes to pension tax in the Budget earlier this month.

His apparent motive was to help the senior National Health Service (NHS) workforce – preventing them from retiring early or working less due to the disincentives created by annual allowance (AA) and lifetime allowance (LTA) charges.

However, Hunt decided to extend the tax benefits to everyone and, by abolishing the LTA entirely, went much further than anyone expected – or was necessary – to solve the problem.

The Labour Party instantly hit back with a commitment to reverse the LTA changes but, crucially, has singled out NHS workers as an exception. We will have to wait to see exactly what it means by that but, for now, let’s focus on the immediate changes.

The abolition of the lifetime allowance has resolved one issue but the annual allowance has always been the bigger problem

Up until the Budget, higher earning NHS consultants and GPs would face the double whammy of both regular AA charges and the prospect of LTA charges when they came to take their benefits.

The abolition of the LTA has resolved one of these issues entirely, meaning they can now build up as much pension as possible without fear of an LTA charge. The change removes a significant disincentive to continue working.

That said, the AA has always been the bigger issue. While the increase from £40,000 to £60,000 will definitely help the problem, there are still likely to be spikes in pension inputs about the annual limit, caused by NHS pay scales and whenever individuals take on additional pensionable responsibilities.

The higher AA coupled with potentially more carry forward available should, however, mean AA excesses are far less frequent. Breaching the £60,000 AA in a defined benefit (DB) scheme would mean an above-inflation pension increase of over £3,750 in a year, which is a considerable sum to accumulate with the full tax advantages.

Whether the tax benefits are enough to keep the workforce motivated is another question

Hunt also revealed that those who have a negative pension input amount in one scheme are now able to offset it against the other scheme within the same year. This is unlikely to have a huge impact but may help those who have small pay reviews in one year (below inflation) and then catch up or larger reviews in subsequent years.

For very high earners, there is still the issue of tapering. However, the increase in the adjusted income limit will move more NHS workers out of scope.

Everyone will have a higher AA with the increase in the minimum tapered AA to £10,000 if adjusted income reaches £360,000 or more. Many NHS workers in this bracket are likely to have an element of private earnings and, in many cases, can control their level of taxable income through the use of limited companies to perform their private duties.

In addition to the changes announced in the Budget, we have also recently seen new retirement flexibilities confirmed and technical changes implemented to resolve pension input issues caused by inflation.

Until we see the outcome of the McCloud judgements, NHS workers remain a little in the dark

The ability to take pension benefits from the 1995 section of the scheme at age 60 and continue to accrue benefits in the 2015 scheme without fear of an LTA charge really should provide a great incentive for doctors to avoid retiring at 60.

That said, whether the tax benefits in themselves are enough to keep the workforce motivated and working when, in many cases, individuals will have already built up a comfortable pension is another question.

All the small steps announced in the Budget are likely to be welcomed. However, until we see the final outcome of the McCloud judgements – where members are put back into the older schemes and pension input amounts recalculated – NHS workers will be a little in the dark about where they stand.

Claire Trott is divisional director, retirement and holistic planning, at St. James’s Place