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What do the pensions proposals mean for GPs?

The Government yesterday committed to fix pensions issues ‘for good’. And it is about time.

The NHS pensions scheme has been a conundrum for GPs and clinicians since changes to pensions tax allowance over a number of years meant that they were being hit with significant bills from HMRC just for paying their pensions contributions,

It soon became apparent to many fed-up doctors that it didn’t make sense to continue in this vein. Instead, they decided to take measures such as cutting their hours, leaving the scheme altogether or retiring early.

The Government has finally decided to act after these measures started to affect the health service. Yesterday, it admitted a third of GPs and consultants could potentially be affected by pension tax charges.

Ministers’ big ideas for pensions centres on a few proposals that will allow:

  • GPs to choose what percentage of their income they pay contributions on;
  • The highest earners to ‘smooth’ big increases in their pensionable income, for example as a result of large pay increases, by spreading these increases over a few financial years – although this will affect consultants more than GPs;
  • Individuals to assess options for using these flexibilities tailored to their personal circumstances through a ’modeller’ that is currently being commissioned by the Department of Health and Social Care.

Health secretary Matt Hancock says the proposals will give doctors ‘unprecedented flexibility’ to take better control of their pension so they do not have to worry about ‘unexpected pension tax bills’.

However, GPs and pensions experts are not so sure. They say that GPs will still struggle to predict their pension growth, and that it will take time for them to figure out what they need to do to avoid tax charges.

This isn’t the first suggestion made by ministers. The Government previously suggested a ‘50:50’ option, in which doctors would have been able to halve their pension contributions and get half the rate of pension growth in return.

But, following criticism, the Government acknowledged this option did not ‘provide sufficiently broad flexibility for individuals to balance their pay, pension growth and tax liability’.

The new proposals set out the ability for doctors to choose their personal accrual level in 10% increments at the start of the year and increase this level towards the end of the year, once they know their likely earnings. This means they would be able to choose what percentage of their will be pensionable – eg, 30%, 50%, 70% – and would pay contributions accordingly.

The consultation document says: ‘Discussions with the medical profession and employers have highlighted the need for flexibility that provides a far more tailored approach to pension accrual. Tailoring pension accrual helps to manage both annual and lifetime allowance liabilities, as slowing down pension growth allows individuals to reach the lifetime allowance limit at a point in time that matches their target retirement age.’

High earners who have a large rise in their income will also be able to avoid a spike in pension contributions by phasing in how much this rise counts towards their pensionable income. For example, a £20,000 pay rise could be phased in over three years, meaning only £10,000 of that rise would count towards pensionable pay in the first year, £15,000 in the second and £20,000 in the third.

However, this is more likely to affect consultants than GPs, as they are on final salary schemes.

Andrew Pow, executive board member of the Association of Independent Specialist Medical Accountants and partner at Mazars UK, says: ‘This is more focused on the hospital sector and people who get uplifts in pensions linked to an increase in their pay rate. GPs (partners, salaried and locums) have always been on a career average earnings scheme and less exposed to spikes.’

However, he adds: ‘This could be useful depending on what’s agreed in the event that someone does for whatever reason go over the allowance.’

But GP leaders are not impressed with the proposals, pointing out they will not solve the issues.

GP Survival chair and pensions expert Dr Nicholas Grundy says although the idea of having flexible accruals is ‘sensible’, it remains difficult to apply in practice as GPs cannot accurately predict their pension growth.

He says: ‘Tackling this in detail will take time. The new proposals are superficially sensible.

‘There are several factors people will consider – “how much will I earn after tax” is certainly one. But another is “how much time and effort will it take to figure all this out”. With the best will in the world, people are already – as we know – sick to the back teeth of the pensions system. For GPs in particular, the organisational fatigue of dealing with Primary Care Services England (PCSE) is enormous, and NHS Pensions aren’t really any better.

‘Flexible accrual sounds sensible, but the problem as above is this requires you to estimate pension growth, and that’s inordinately difficult. It’s even more so for GPs than consultants, and it’s telling that not one of the worked examples in section 10 of the consultation covers a GP’s situation.’

Mr Pow says: ‘The consultation is welcomed on the basis it’s an improvement on the 50:50 proposal but as it stands it won’t fully solve the issue.

‘Higher earning GPs will still face significant difficulties with what is proposed. Firstly, to accurately predict their pension growth GPs need to know what pension they have built up at the start of the year and what they will earn. Due to significant issues with processing of annual pension returns by PCSE many GPs cannot access pension records. Secondly, as GP partners and locums do not receive salaries what they earn cannot be established until after the tax year has ended.

‘So being able to predict how much to pension at the start of a tax year or even adjust it mid-year is very difficult.’

Choosing a lower accrual level also means that the employer pays lower contributions. The Government says the recycling of any unused contributions in this instance should at the discretion of individual employers.

Dr Grundy says it is ‘disappointing’ that the Government has not ‘required the payment of employer contributions to staff if they do opt out, despite it being referenced in recent NHS Employer’s pensions guidance.

The Chancellor announced that the Treasury will ‘review’ how the tapered annual allowance works to support the delivery of public service but has not hinted at scrapping it altogether, a move deemed by the BMA to be the only ‘real solution’ to the pensions crisis.

A lot will hinge on the responses to the consultation, and whether the Government will take on board those responses – which they did for their 50/50 option, in fairness.

However, despite the introduction of flexibility into the pensions tax system, the problems around complexity and uncertainty for GPs around whether they are breaching their limits look set to remain. These reforms may not be enough to stem the tide of GPs cutting hours or retiring early.