The recent scrapping of the lifetime allowance and the increasing of the threshold for annual allowance to £60,000 from £40,000 announced in the spring Budget lead me to ask the question: what behaviours are we trying to encourage with any tax changes?
Three clear behaviours spring to mind:
Keep paying into your pension
In the case of the NHS's most senior clinicians, it is very clear that we need more of them to carry on working for longer to help chip away at those waiting lists.
An article entitled "The long goodbye? Exploring rates of staff leaving the NHS and social care", published by the Nuffield Trust in February 2022, found that for hospital consultants in particular, pensions taxation was a key issue.
Half of those who had made definite plans to leave the NHS reported pensions tax to be a major factor in their decision to leave.
Furthermore, the British Medical Association found that, in repeated surveys it has run over recent years, pensions taxation was one of the major factors causing doctors to either retire early or reduce their hours.
It has been calling for the pensions taxation system to be urgently reformed following Rishi Sunak’s decision, back in March 2021, to freeze the LTA until 2025-26.
If the pensions tax regime needs to encourage more of us to keep on working, as Jeremy Hunt stated, then the freezing of the LTA worked directly against that.
First, it encouraged more pension savers each year to retire at the point where they were coming close to the £1.07m upper limit.
Second, it encouraged all defined contribution pension savers approaching retirement age to move their savings into cash or low-return assets to avoid unwelcome heavy tax bills linked to exceeding the LTA, while annual allowance thresholds could be avoided by simply diverting additional savings for retirement, into Isas for example.
However, for NHS workers these sorts of adjustments were not an option because, in defined benefit schemes like the NHS pensions scheme, it is impossible for employees to control in-year pension growth. NHS workers’ pension growth is directly linked to the value of pensionable pay.
Increasing pensionable pay, either through extending hours worked or having a pay rise, can lead to AA or LTA penalties.
While the NHS staff were the most visible manifestation of this conundrum, I am sure there were many others similarly discouraged from becoming more productive.
Invest pensions money for the future
Once we have fresh eyes on pensions tax changes, what else can we change for the better? Pensions offer an opportunity for a massive transfer of wealth between the generations. So, it is eminently sensible long-term thinking to invest pensions money into the businesses of the future.
Too many pension funds, both DB and DC, are invested overcautiously. This is leading to calls for investment control to be taken away from trustees, perhaps for certain investments to be mandated or for the creation of state-sponsored superfunds.
