Following months of headlines about the NHS Pension Scheme (NHSPS), the government has launched a consultation on a proposal that would make a new option available to medical practitioners.
What are the proposed changes?
The proposal is to introduce an initiative known as the 50:50. This would allow practitioners in the NHS to halve their regular pension contributions in exchange for halving the rate of pension growth.
If applied, the change would mean that a typical NHS pension pot would build more gradually over a GP’s working life and could mean savers avoid tax charges from exceeding the annual allowance (the amount you’re allowed to save into your pension tax free each year, currently set at £40,000).
The proposals would apply to anyone who has, or is likely to contribute, more than £40,000 to their pension pot in a year, and/or those who have an adjusted income of more than £150,000.
Why introduce this change?
The change is being considered as a solution to the current situation which means that GPs and consultants are cutting back on work or refusing shifts to avoid taxes that mean they pay money for working more because they have breached the annual allowance threshold.
The BMA has previously warned that even GPs in their 30s have been advised by accountants to reduce their working hours to avoid the tax charges. Meanwhile, many doctors are electing to retire when they reach the lifetime allowance limit (the total amount you can save tax free into a pension pot).
Will it work?
Whether the proposed change will deliver the desired results remains to be seen.
However, the 50:50 plan could be a useful option for some – particularly for those who are expecting significant increases in their annual salary and could hit the annual allowance threshold, or for those who don’t want to contribute the standard amount into their pension pot so they have more money in their pocket each month. It is also a useful alternative to opting out of the NHSPS altogether.
The challenge for GPs wanting to take advantage of the scheme will be understanding what their likely pensionable earnings will be in a year.
At the start of each year GPs will have to decide to take the 50:50 option based on what their projected earnings will be, but this is not always easy. One way of to do this would be to look at your average earnings over the past few years to try to build a reasonable prediction of your likely income – although this might not work for those planning to increase the work they do, or if you are a partner and know there a significant change in your business is likely (for example a fellow partner retiring and not being replaced).
The suggested scheme is not a new concept – it has been used in the Local Government Pension Scheme for several years – and while it could benefit some, there are suggestions that it doesn’t go far enough.
Some GPs and sector specialists are calling on government to make more wide-sweeping reforms to the taxation of pensions and changing the annual and lifetime allowance rules for everyone. The BMA has also warned that the 50:50 option should just be a short-term measure while wider reform of the pension taxation system is undertaken.
If you are unsure about what the proposed changes could mean for you, speak to a specialist financial services provider who can help you to understand the impact it may have on your finances.
- Parminder Gill is advice policy consultant at financial services mutual Wesleyan. For more information, visit www.wesleyan.co.uk
This information is based on current understanding of legislation. The information contained in this article does not constitute financial advice. Legislation and tax treatment can change in the future.