NHS Pension Scheme: Tapered Annual Allowance

Part of the debate – in Westminster Hall at 11:15 am on 2nd April 2019.

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Photo of Jackie Doyle-Price Jackie Doyle-Price The Parliamentary Under-Secretary for Health and Social Care 11:15 am, 2nd April 2019

I have not, but this is about the impact of the pension and tax regime on the sector. I am not aware of any conversations with the Treasury, but if the hon. Gentleman has concerns, I encourage him to make representations. There are always unintended consequences with any policy, and we always need to challenge the operation of our policies to make sure they are in the right place and to decide whether they need to be refined, tweaked or changed in any way.

The Government recognise that pension tax considerations will contribute to decisions by some senior clinicians to retire early or to reduce their NHS commitments. For those who wish to remain in the NHS pension scheme, the annual allowance is a disincentive to take on additional work and responsibilities —that is very clear. The extra income increases the impact of the tapered annual allowance.

Some clinicians may judge that a reduction in their current NHS commitments, while maintaining scheme membership, better serves their financial interests. Employers tell us that the reduction in service capacity can be difficult and that capacity is expensive to replace. I assure my hon. Friend that the Government are listening carefully to the concerns raised by senior doctors and NHS employers about the impact of the tapered annual allowance.

That doctors may seek to limit or reduce their NHS commitments is of concern to Ministers, and something on which we are keeping a close eye. Maximising the participation of our clinical workforce is clearly essential to the delivery of our ambitions for the NHS. The quality and quantity of our workforce is always an important factor in the extent of the delivery of our objectives.

As an immediate step, the Department has sought to make available to NHS pension scheme members all possible flexibility under Her Majesty’s Revenue and Customs legislation and the current fiscal framework for public sector pension schemes. The BMA asked that we extend the scope of the voluntary “scheme pays” facility—implemented by the NHS pension scheme—to cover the payment of tax charges from breaches of the tapered annual allowance.

We have done that, but we have also gone further. The NHS pension scheme’s voluntary “scheme pays” facility has also been extended to cover tax charges of less than £2,000, which means that, from tax year 2017-18, a member can elect for the scheme to pay 100% of their annual allowance charge to HMRC on their behalf. The “scheme pays” facility allows individuals to settle their tax charge without needing to find funds up front, but HMRC requires an adjustment to the benefits accrued by members if a defined benefit pension scheme pays an annual allowance charge. That adjustment must be just and reasonable, and with regard to normal actuarial practice.

Accordingly, the NHS pension scheme applies an interest rate to the charge paid on the member’s behalf. That charge is deducted from the capitalised value of the pension at retirement, with the interest rate set at the scheme discount rate. I recognise that, for some younger clinicians with many years before retirement, the compounding effect might influence the attractiveness of “scheme pays”, so I encourage members of the pension scheme to seek formal financial advice.

The Government will look at potential further measures. There is clearly considerable interest in this matter, and I assure hon. Members that we keep the impact of public sector pay and pensions policies under constant review, and take account of total reward and fiscal considerations. As my hon. Friend recognises, the issue is complex, and it is difficult for the Government to strike the right balance among competing interests. I do not think, however, that there is a case for exempting high-earning NHS staff, such as GPs and consultants, from a tax measure that is intended to apply to high-earning individuals. I also doubt that clinicians necessarily expect to be treated differently from other taxpayers.

The fiscal framework within which the NHS pension scheme operates is an important consideration. The NHS pension scheme, like most public service pension schemes, does not manage a fund of assets out of which pensions are paid. It is instead financed on a pay-as-you-go basis similar to that of the state pension, with contribution income defraying the cost of pensions in payment. Any change to scheme rules that provides flexibility could therefore have a significant effect on contribution income. That would have an impact on the Exchequer. We must balance that fiscal risk against the benefits of providing additional flexibility. Any proposed pension flexibility would be a matter for the Chancellor.

Clearly, this is a complex subject that we will have to keep under review in recognition of the fact that it drives behaviour in the NHS in a way that could cause us difficulties in the delivery of our overall commitments. We clearly want to retain the best, most qualified and expert staff in the NHS, and we need to be vigilant to ensure that our tax and pension benefits system does not stand in the way of delivering the best possible NHS.

Question put and agreed to.

Sitting suspended.