NHS pension and tax charges: no option to reduce pension contributions?

SouthLondonUser

This doesn't affect me directly, so it is really just curiosity.

I often read in the press about how NHS employees are subject to unfair tax charges because of their pensions.

In the private sector, most if not all employers give you the option to:

1. not receive any pension contribution, if you have already reached your lifetime pension allowance (ie your total pension pot > than a certain amount, I think about £1m), or
2. to receive less into your pension, if you earn so much that the regular pension contribution would be above the maximum you're allowed for the year

In both cases, that money would be paid to the employee, subject of course to income tax and national insurance deductions. In both acses, employees choose these options if they don't want to pay any extra tax pension charge.

Does the NHS not offer the same options?

PS I know that NHS pensions are defined-benefit while most private pensions are defined-contributions. There are certain multiplying factors set by HMRC every year so that, for example (I'm just making numbers up, don't know the real factors) a £40,000 defined benefit pension corresponds to having  £1,000,000 in a defined-contribution pension pot.

Andy_L

No. I believe that is because it is a statutory scheme, ie its rules are defined by legislation so cannot be ignored.

One of the calls for change is to allow the things you suggest

SouthLondonUser

I see.
I am not particularly sympathetic to the plight of those who have more than £1m (or annuity equivalent) in their pension pot, or to those who earn so much in a given year (I think > £200k or so) that their annual pension allowance starts to go down. Cry me a river.

But, yes, if the NHS does not even give the option to reduce pension payments, that's crazy and I'd  be very upset at that, too.

Albermarle

In both cases, that money would be paid to the employee, subject of course to income tax and national insurance deductions. In both acses, employees choose these options if they don't want to pay any extra tax pension charge.

I do not think this would apply to all, or even a majority, of employers. With most you will probably only have two options - opt in the pension, or opt out and lose the employer contribution.

You could of course reduce your own contributions to the minimum necessary to get the maximum employer contribution.

SouthLondonUser

@Albermarle To be honest I do not know how many employers offer this, but I know for a fact that, in the sectors with the highest salaries, quite a few employers offer these options. It also becomes a competition thing: your offer becomes much less attractive if many direct competitors offer, say, 10% pension contributions, of which the part above £4k can be had cash, and you don't.

Obviously this only applies to a small minority of privileged employees and sectors - if you run, say, a delivery company, you're  unlikely to have employees earning > £200k or whatever the threshold which reduces your annual allowance is, so it's probably not worth bothering setting it all up.

Albermarle

SouthLondonUser said:

@Albermarle To be honest I do not know how many employers offer this, but I know for a fact that, in the sectors with the highest salaries, quite a few employers offer these options. It also becomes a competition thing: your offer becomes much less attractive if many direct competitors offer, say, 10% pension contributions, of which the part above £4k can be had cash, and you don't.

Obviously this only applies to a small minority of privileged employees and sectors - if you run, say, a delivery company, you're  unlikely to have employees earning > £200k or whatever the threshold which reduces your annual allowance is, so it's probably not worth bothering setting it all up.

I used to work for a huge organisation. I think some form of negotiation on the issue was possible at Director/Senior manager level, but not below that, even though some middle managers could certainly be hitting LTA issues as they got older.

DoublePolaroid

Depending on a few small variables, annual allowance tax charges can kick in somewhere around about £130k annual pensionable income (annual pension is income/54 in the 2015 scheme and the multiplier for AA purposes is 16). A lot of money, to be sure and I suspect most earning that much would not expect any sympathy for their "plight". It does nevertheless affect a significant proportion of consultants and GP's, to the point where it absolutely does cause changes in behaviour which are detrimental ultimately to everybody who uses the health service, because one of the ways to mitigate the issue described in the OP, given contributions are fixed, is by reducing the number of hours worked. The only other solutions are to come out of the scheme altogether (which is detrimental in terms of some of the scheme benefits and in terms of annual uprating) or paying the tax charge, which is likely to end up being necessary in all subsequent years, if nothing else changes.

LTA is 20x annual pension plus any lump sum. It's not unreasonable to think 2015 scheme members who become GP's or consultants at an average rate of career progression might hit this in their mid-50's. Again, it's an excellent problem to have but again it potentially changes the behaviour of those affected to the detriment of the NHS.

Marcon

SouthLondonUser said:

This doesn't affect me directly, so it is really just curiosity.

I often read in the press about how NHS employees are subject to unfair tax charges because of their pensions.

In the private sector, most if not all employers give you the option to:

1. not receive any pension contribution, if you have already reached your lifetime pension allowance (ie your total pension pot > than a certain amount, I think about £1m), or
2. to receive less into your pension, if you earn so much that the regular pension contribution would be above the maximum you're allowed for the year

You're making a sweeping statement which is far from true. Where on earth did you get the idea that this is the norm in the private sector? It certainly isn't!

Andy_L

SouthLondonUser said:

I see.
I am not particularly sympathetic to the plight of those who have more than £1m (or annuity equivalent) in their pension pot, or to those who earn so much in a given year (I think > £200k or so) that their annual pension allowance starts to go down. Cry me a river.

But, yes, if the NHS does not even give the option to reduce pension payments, that's crazy and I'd  be very upset at that, too.

although you might be concerned that as a result of this tax consultants are choosing to retire early/go part-time/not do extra shifts

SouthLondonUser

Andy_L said:

although you might be concerned that as a result of this tax consultants are choosing to retire early/go part-time/not do extra shifts

Absolutely.

I wasn't having a Corbynist "tax all the filthy rich" type of attitude

In fact, I think a reasonable approach would be some combination of:

• giving employees the option to receive extra contributions as cash, so as not to trigger a pension tax charge, and/or
• having a tax--unregistered scheme:  the contributions do not benefit from tax relief, but for this very reason the taxman won't ever come knocking because you have contributed too much. Judges have something similar: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1064081/jps-scheme-guide-2022-not-accessible.pdf

FWIW, I appreciate that teachers and doctors get very generous defined-benefit pensions, which private employees can only dream of, but I think that's fair, I think it's important the country offers at least something to attract key workers in crucial roles like teaching and medicine, since, after all, the country doesn't seem to want to pay more taxes to find the money to offer more decent wages to those categories - clapping NHS workers is easy, agreeing to get taxed more not quite...

A separate discussion would be on the very sorry state of financial (il)literacy in the country, and on how many teachers and doctors have no clue whatsoever how their pension even works.

SouthLondonUser

Marcon said:

You're making a sweeping statement which is far from true. Where on earth did you get the idea that this is the norm in the private sector? It certainly isn't!

You're right, I don't know how common that is. I know of many companies which offer these options but I cannot quantify how representative or not they are.