AAB: plan now for good health of your public sector pension
Richard Johnston offers his prognosis on legislative changes affecting high-earning professionals in the National Health Service
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 set at £1,073,100. Normally, this would be linked to the Consumer Prices Index rate of inflation so that it increases every annum. This year, the UK Government has 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 that excess savings which break the limit bring about heavy tax penalties. You will pay 25 per cent tax on any excess you take as a pension, or 55 per cent if you take it as a lump sum. This is designed to claw back the tax relief you receive on those savings.
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 that is muddying the waters around the future of pension savings for surgeons, doctors, consultants, and indeed all NHS and wider public sector workers.
Complex legislation on pensions has imposed new regulations on individuals saving in public sector schemes, by redrawing the thresholds between different age groups and how their pension savings would be treated.
In the case of the NHS pension, it is divided into three sections and, in each, the benefits of the savings are calculated differently.
This meant that two people born two years apart could receive quite different treatment, based on age.
The Court of Appeal ruling on two landmark employment tribunals, concerning the pensions of judges and firefighters, confirmed that this legislation 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 – right across the board – would now 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 in a cloud of confusion, as they do not know what the detailed outcome of this review will be. All they have been told is that the NHS is targeting October 2023 as the date by which they will provide clarity to their members on their benefits.
At AAB Wealth we are following developments in these pension reforms, and even prior to eventual clarity in two years’ time, we can advise you – at any point – what the most likely outcomes will be.
We are also able to advise on the effects of the Lifetime Allowance on your pension, and look at ways for you to minimise, or even eliminate altogether, any unexpected tax liabilities you might incur.
Richard Johnston is a Chartered Financial Planner at Anderson Anderson & Brown