NHS pensions: Is this the remedy it’s cracked up to be?

On 5 December 2022 the Government published a consultation document covering proposed changes to the NHS pension scheme. This was largely in relation to the horror-stories that could have materialised for Annual Allowance charges in the 2022/23 tax year. I won’t go into too much detail here, as my colleague Katie Skea has summarised the reasons in detail in a previous blog, Watch out for annual allowance increases in 2022/23.

In summary, GPs with benefits in the 1995/2008 Scheme and all members in the 2015 Scheme face a disconnect between how HMRC assess pension growth and how the NHS pension scheme uplifts those benefits. HMRC use the September consumer price index (CPI) percentage for the year before the start of the tax year, while NHS pensions use the September CPI percentage arising in the tax year. Until recently this made little difference as inflation had been relatively stable for some years. However, with September 2021 CPI at 3.1% and September 2022 CPI at 10.1%, there is now a substantial gap of 7%.

This means that growth in excess of inflation, the measure you’re potentially taxed on, is artificially inflated. GPs and all 2015 Scheme members also receive an additional 1.5% uplift, increasing the gap for them to 8.5%.

The consultation proposes moving the revaluation of pension benefits from 1 April 2023 to 6 April 2023, in effect deferring the inflationary uplift into the next tax year. Whilst you might think this just puts off the problem, removing the disparity between the uplifted brought forward values compared to those carried forward is likely to mean lower HMRC-measured growth. There will still always be an additional 1.5% uplift (one of the many positives of the NHS scheme), as well as an additional year’s pension benefits earned, but essentially this change should reduce your tax liability.

In addition, the consultation includes:

Retirement flexibilities

24-hour retirement

NHS members can access pension benefits by ceasing all NHS related posts for 24 hours and returning under a new contract. 1995 Section members were restricted from working more than 16 hours in the month after 24-hour retirement. Throughout COVID-19 this rule was relaxed and the consultation document suggests removing this restriction permanently.

Pensionable re-employment

Once 1995 Section benefits are accessed members can no longer build benefits in the 2015 Scheme, although the 2015 Scheme benefits continue to grow with inflation. The consultation document proposes allowing members to access 1995 Section benefits while continuing to build those in the 2015 Scheme (already the case for 2008 Section members). The motivation is to encourage NHS staff to stay on, even in a reduced capacity, to bridge the gap between pension and state retirement ages.

Partial retirement

1995 Section members cannot currently partially retire. It is proposed that once members reach their minimum pension age of 55; they will be eligible for partial retirement if they reduce their pensionable pay by at least 10% (for GPs a 10% reduction in commitment).

There are also proposals to allow 100% draw-down in the 2008 Section and 2015 Scheme, rather than the current 80%, whilst continuing to build benefits.

Scheme access policy

The proposals look to ease access to the NHS pension scheme, predominantly in relation to Primary Care Networks (PCNs). Those involved in PCNs may have considered utilising a company to house ARRS and other PCN staff, or perhaps fully sub-contract the DES to it. In those cases, pension access is key to retain staff and access has only been afforded by applying to NHS pensions for ‘temporary direction status’ – a specific application due to close on 31 March 2023.

The consultation proposes allowing PCNs permanent access to the NHS pension scheme if they meet one of eight scenarios. These largely cover the various structures of PCNs (as before), but most importantly cover various company arrangements. If you are considering creating a company for your PCN, I’d suggest reviewing the scenarios to ensure these will fit. Of course, these are only ‘proposals’ at this stage.

How we can help

We can calculate the tax implications of your pension, including whether tax charges may apply in future years and at retirement. We can also review NHS pension paperwork to identify previous tax charges or look at issues with pension statements.

If you have any questions, please contact me or your usual medical team contact.