Tapering over the cracks: Government hints at pension tax reform amid NHS crisis

Tom Selby
7 August 2019

•    Treasury says it will “review how the tapered annual allowance supports the delivery of public services such as the NHS” (https://www.gov.uk/government/news/nhs-pensions-for-senior-clinicians-new-changes-announced-to-improve-care)
•    Government also plans to replace recently-announced ’50:50’ option with more flexible alternative
•    Around a third of NHS consultants and GP practice partners risk being hit by the taper
•    Policymakers urged to carry out broader review of complex pension tax rules

Tom Selby, senior analyst at AJ Bell, comments: “The Government has got itself into a real mess over the pension tax taper. 
“For months the Treasury has insisted the horrendously complicated taper was a central part of the system and here to stay. 
“While today’s announcement from recently appointed Chancellor Sajid Javid isn’t quite a U-turn, it represents a significant shift in position from his predecessor Philip Hammond. 
“High-earning consultants and GPs are refusing extra shifts because of the impact the taper has on the tax they pay, placing significant strain on the UK’s already creaking health system. 
“Scrapping the taper would be the simplest way to deal with this problem, although it would also leave a £1billion-a-year hole in the Exchequer’s finances that would need to be plugged.
“It’s important to note the taper applies to all savers, not just those in the public sector. It acts as a significant disincentive to long-term saving and creates a complex barrier to effective retirement communication. We know this complexity puts people off pension saving and it needs to be tackled head-on.
“Rather than just reviewing how the taper interacts with public services and the NHS, the Government should broaden its horizons to consider the potentially harmful consequences of other pension tax measures. 
“The Money Purchase Annual Allowance, for example, is poorly understood and severely hinders the ability of people to save in late life. Similarly, the lifetime allowance is a wormhole of complexity which, after successive cuts in recent years, affects an increasing number of people – particularly in the public sector. 
“A review of retirement saving incentives aimed at removing unnecessary complexity and encouraging more people to save for their future is long overdue and could create a system people can genuinely engage with.”

The alternative   

“Although the Treasury has hinted at a review of the pension tax taper, it is far from clear this will result in any meaningful action. It appears, for now at least, changes to the scheme design along these lines remains the preferred option.
“It was a matter of weeks ago the Department of Health and Social Care set out plans to introduce a ’50:50’ option which would allow high-earning consultants and GPs to reduce contributions by 50% and receive 50% pension in return.  
“This convoluted compromise is set to be replaced by a more flexible alternative which allows NHS staff to choose how much accrual they give up. 
“While this may help to an extent, many affected by the taper will inevitably decide they don’t want to jump through hoops only to end up with a lower pension.”

How the annual allowance taper works

Whether or not someone is affected by the annual allowance taper depends on two things: ‘adjusted income’ and ‘threshold income’. Broadly, adjusted income includes all taxable income and employer pension contributions. 
Threshold income is total taxable income and any salary sacrifice arrangements set up since 9 July 2015 less any personal pension contributions. Any lump sum death benefits where the recipient is liable to tax are also deducted from both income measures.
If someone’s adjusted income is above £150,000 and their threshold income is above £110,000, they will be affected by the taper. Their annual allowance will be reduced by £1 for every £2 of adjusted income above £150,000. 
For example, if their adjusted income was £160,000 for a given tax year their annual allowance would drop by £5,000 to £35,000.

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