The Chancellor is removing the Lifetime Allowance, and the Annual Allowance is being raised from £40,000 to £60,000 from April 2023. The stated aim of both these measures is to help ensure that high skilled individuals, such as NHS clinicians, are not dis-incentivised from remaining in the workforce.

The purpose of this briefing note is to consider in detail the impact of the Budget measures on the NHS.

Summary of the Budget measures

In order to increase labour market participation from inactive individuals who are aged over 50, the government has announced the following:

1. the Government will offer an expanded midlife MOT review scheme to help individuals take stock of their finances and wellbeing to prepare for a more secure retirement, specifically:

• the digital strand of the offer will be expanded to ensure more people can access targeted online guidance regarding their career, health and finances
• the in-person midlife MOT offer will be expanded by the DWP, providing more financial planning and awareness sessions.

 2. Pensions tax - in order to incentivise highly skilled individuals to remain in the labour market, including the NHS:

• the Government will remove the Lifetime Allowance charge in April 2023, before completely abolishing it in the 2024 Finance Bill
• will raise the Annual Allowance from £40,000 to £60,000 from April 2023
• tax changes in respect of flexible retirement - once an individual flexibly accesses their defined contribution pension savings, the total tax-relieved pension savings they can make each year is restricted to the level of the Money Purchase Annual Allowance. To help support those who have left the labour market to return and supplement their income or build up their retirement savings, the government will increase the Money Purchase Annual Allowance from £4,000 to £10,000 from 6 April 2023
• individuals will still be able to carry forward unused annual allowances from the three previous tax years – with the adjusted income threshold for the tapered annual allowance being increased from £240,000 to £260,000 from 6 April 2023.The maximum pension commencement lump sum for those without protections will be retained at its current level of £268,275 (25% of the current Lifetime Allowance of £1,073,100)
• Public Sector - to increase retention in the workforce of the public sector, open and closed public service pension schemes for a given workforce will be linked for the purposes of calculating Annual Allowance charges, allowing members to offset any negative real growth for Annual Allowance purposes in legacy public service pension schemes against the Annual Allowance.

As well as helping members to achieve an appropriate work life balance and giving them a greater degree of flexibility around how they take their pension benefits, the reform proposals are designed to support patient care by ensuring that highly skilled individuals, such as NHS clinicians, remain in work longer or return to service after previously taking early retirement. This, according to the Department of Health and Social Care (DHSC), could help tackle care backlogs and provide an important boost to NHS capacity at a crucial time.

Abolition of the Lifetime Allowance (LTA)

There has been some debate regarding the Government’s stated rationale for abolishing the LTA, i.e. that it would reduce the likelihood of individuals giving up work. This is because the charge only arises when a pension comes into payment and there are a number of arrangements that people could use to avoid triggering the LTA charge.

It has been suggested that HMRC has decided to scrap the LTA because of the administrative difficulty of operating protections, and because the LTA charge is not generating significant revenue. Whatever the precise reasons, the abolition of the LTA does represent a real simplification of the pension tax regime.

On 27 March 2023, HMRC published guidance on the abolition of the LTA, including information on the limit on the pension commencement lump sum and LTA protections. On the question of these protections, HMRC has confirmed that a member who holds a valid enhanced protection or a valid fixed protection will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection, provided that this protection was applied for before 15 March 2023. In addition, if a successful late application is made for enhanced protection or fixed protection on or after 15 March 2023, the member will be entitled to a higher pension commencement lump sum. However, they will be subject to all of the current rules for protection cessation events. This means if they have a protection cessation event after 6 April 2023, they will lose their lifetime allowance protection.

Updated guidance will be published on 6 April 2023 and HMRC will provide further updates on the LTA changes through future newsletters.

Raising the annual allowance to £60,000

The abolition of the lifetime allowance has resolved one issue but the annual allowance has always been a more significant problem.

For the NHS Pension Scheme members the Annual Allowance has proved problematic in recent years as scheme members do not have control over pension growth, due to the 1995 and 2008 Sections of the NHS Pension Scheme being linked to final salary. Hence any large increases in pay, such as an increment or pay award, could create a significant amount of pension growth. In addition, NHS pension growth has been impacted by inflation and the disconnect between the amount HMRC allows for, and the amount of an individual’s pension revaluation under the NHS rules.

 With the Annual Allowance being increased to £60,000 from 6 April 2023, any NHS members who regularly breach the £60,000 allowance (of annual pension accrual) are likely be taxed at 40-45%, meaning a saving of c.£8,000-£9,000 per year going forwards – clearly a significant amount. Tapering will now only come into effect when ‘adjusted’ income exceeds £260,000. The increase in the adjusted income limit will move more NHS workers out of scope, but for very high earners, tapering may still be an issue. There will be an increase in the minimum tapered Annual Allowance to £10,000 if adjusted income reaches £360,000 or more.

However, the majority of NHS pension members will probably no longer incur Annual Allowance charges (unless they retain final salary links with 1995/2008 benefits and receive pay increments in a particular year). This is not only due to the increase in the threshold itself but also due to the realignment with inflation, and because only very high earners will create sufficient pension growth to breach the new threshold, taking into account the increased “carry forward” allowance available. NHS pensions are uprated by 1.5% above the Consumer Price Index (revaluation) and this 1.5% will still count towards pension growth.

The Chancellor has also confirmed that those who have a negative pension input amount in one scheme are now able to offset it against another scheme within the same year. This may help those who have small pay reviews in one year (below inflation) and then catch up or larger reviews in subsequent years.

Pension recycling schemes

With these changes, employers who have implemented their own pension recycling policies, offering a pay increment to individuals affected by the annual allowance/lifetime allowance, need to decide –

• whether to update their written policies to reflect the new taxation regime; and 
• whether or not there is in any event still a need/justification for such policies in view of the changes (noting that the changes may be reversed by a new Government).

Conclusion

It remains to be seen if these tax benefits are enough to help keep the NHS workforce motivated.

In addition, to the taxation changes in the Budget, we have also recently seen new retirement flexibilities confirmed by the Government. Until more is known regarding the calculation of the McCloud remedies, where members are put back into the older schemes and pension input amounts recalculated, there will remain some ambiguity in the calculation of pension benefits for some individuals.

It is clear that the ability to take pension benefits from the 1995 section of the scheme at age 60 and continue to accrue benefits in the 2015 scheme without any LTA charge really should, in principle, provide some incentive for doctors to avoid retiring at 60.

The Office for Budget Responsibility has estimated that the plans to abolish the lifetime allowance and raise annual tax-free savings allowances from £40,000 to £60,000 may lead to 15,000 people returning to work.

The Labour Party’s promise to reverse the abolition of the lifetime allowance on pension savings could lead to more doctors and NHS professionals rushing to build up accelerated pension savings, and then retiring early before the election if they think Labour will get into power.

How Capsticks can help

Capsticks has significant experience of supporting healthcare sector employers on all kinds of pension issues, so you can operate effectively within the NHS Pension Scheme and avoid risks for your organisation and employees.

For further details on the issues discussed, please contact Neil Bhan to find out how we can help.