Maggie's inside track: Why the NHS pensions crisis is a risk to us all

The NHS’s latest pensions crisis is a case in point. Senior consultants and other high-paid staff have been turning down additional shift work because it has landed them with onerous tax bills – often tens of thousands of pounds – for breaching the pensions annual allowance (the amount of money you can save tax-free into a pension each year). 

That has led to ever-lengthening waiting times for treatment and unprecedented levels of early retirement amongst GPs, surgeons and other senior staff.

More specifically, many NHS staff have been caught out by the annual allowance taper, which gradually reduces the amount of tax-free pension savings someone can make once their total income exceeds £110,000.

‘Total income’ means more than just salary. Bonuses, interest on savings and rental income from a property, for example, are just some of the items that would be taken into account when assessing this figure.

This week, the government released a new consultation, setting out a proposed solution to the NHS’s current problem. It has committed to reviewing the taper across the public sector, and permitting NHS staff to specify their own level of pension accrual at the start of a year to help them avoid being hit by annual allowance breaches.

The NHS’s problems also extend to many other public sector professions as well. Not surprisingly, other bodies, including the Fire Brigades Union, are unimpressed that the same accrual flexibilities won’t be automatically offered to their members.

With the taper predicted to net the Treasury around £1.2bn in this financial year, it’s perhaps also unsurprising that the government hasn’t announced a wider review of the annual allowance, along with the lifetime allowance, which determines how much someone can save tax-free into a pension across their lifetime, and the money purchase annual allowance, which restricts the amount of money someone can save tax-free once they have started withdrawing funds from their pension pot. 

While it is tempting to see the current NHS malaise as a rich person’s problem, the £1,055,000 lifetime allowance is increasingly ensnaring middle-earners too. And as already discussed, the definition of ‘total income’ used for the annual allowance makes it dangerously easy to inadvertently breach the taper threshold.

The current allowance system was widely criticised when it was announced in 2016, with many concerned that it was storing up problems for the future. The outcome of those problems include the NHS crisis. Who would have thought that an apparently benign employee benefit could literally put lives at risk? The wider effects, of senior staff leaving the workforce early and losing interest in pensions as a form of savings, are much less sector-specific.

A wider review of pension tax allowances is now needed. If there are any tax restrictions on saving at all, they must be fit for purpose and not deter employees from saving for retirement.   

Some would even argue that reviewing allowances isn’t going far enough.

In a future world where ‘retirement savings’ rather than just pensions is the focus, perhaps it is time for a more radical overhaul of how people are incentivised to save for the long-term, including ISAs and other forms of saving. Either way, the outcome must be a system that is fair, consistent, easy for everyone to understand and doesn’t contain complicated financial bear traps.  

A wider review of savings taxation might take more time and focus than the government is currently able to give. But the current NHS-specific sticking plaster consultation cannot be the final word in this debate either. 

The author is Maggie Williams, content director at REBA