Pension rules leaving NHS with fewer doctors, new figures show

First published by The Herald on Sunday on 8 March 2020

GROWING numbers of senior doctors are quitting the NHS or are not working additional shifts after being hit with more than £8 million in pension charges for working extra hours, new figures show.

Medics have been warning for more than a year they would cut back on workloads because of the complex pension rules, and now figures show that NHS Dumfries and Galloway, NHS Fife, NHS Lanarkshire and NHS Tayside are among the boards that have seen increasing numbers of consultants retire.

NHS Orkney and NHS Shetland, meanwhile, have both seen a sharp decline in the amount of overtime their senior doctors are working since the rules came into force in 2016.

Boards do not record the reasons for these changes and not every consultant retiring from service will be doing so because they are disproportionately affected by rules designed to stop higher earners benefiting from pensions-based tax breaks.

However, Graeme Eunson, chair of the British Medical Association’s Scottish consultants’ committee, said that after being hit with large, unexpected tax bills growing numbers of senior doctors “are taking the sensible option of limiting the amount of work they are doing or refusing to take on extra responsibilities”.

The issue has occurred because of the complex way the legislation, which was introduced by former Chancellor George Osborne, operates.

Everyone is allowed to save £40,000 tax-free into their pension each year, but because of the way tax relief works the Government effectively pays £41 in £100 into the pensions of higher-rate taxpayers but just £21 in £100 into those of Scottish intermediate-rate taxpayers.

Osborne’s solution for this anomaly was to limit the level of savings higher earners can claim tax relief on, with the so-called tapered annual allowance being introduced in 2016. That sees the amount that can be saved tax-free reduce from £40,000 to £10,000 for those earning over £110,000.

The problem senior doctors have faced is that working extra shifts to help clear waiting-list backlogs has resulted in them inadvertently breaching that earnings threshold, and that has resulted in them having to pay a charge to the Treasury.

Due to the complex way those charges are calculated, many have had to pay out more than they have received in additional pay, with one consultant triggering a £9,000 charge by earning just £2,000 in overtime.

Keith Brooks, a financial planner at advisory business Aberdein Considine, said that while the annual allowance was initially introduced in 2006 as part of the Labour Government’s so-called pensions simplification measures, “that is the biggest oxymoron in history”.

He said: “The rules have got increasingly complex as things have evolved and [because of the taper] are now a complete disaster.

“There’s no way a lay person could understand how they operate and if they don’t understand there’s no way they can plan. That’s why some NHS people have been really penalised.”

The extent to which NHS staff have been hit is clear from figures released under FOI by the Scottish Public Pensions Agency (SPPA). In 2015/16, the last year before the taper was introduced, 381 members of the NHS pension paid an annual allowance charge while in 2016/17 that had risen to 630. In 2017/18, the figure had more than doubled to 1,364.

The total amount paid out in charges has risen sharply too, from just over £155,000 in 2015/16 to £8.6m in 2017/18.

While pensions legislation is reserved to Westminster, the Scottish Government introduced a temporary fix at the end of last year that allows members of the Scottish NHS scheme to reduce the amount they save into their pension while taking their employer contribution as taxable income.

It is clear that many consultants are preferring to deal with the situation by reducing their workloads instead, however. Figures provided by NHS Tayside show that the number of consultants retiring from practice increased from nine in 2016/17 to 16 the following year, with 12 leaving the service in the first half of the current year.

Similarly, in Dumfries and Galloway, while one consultant retired in 2016/17 and 2017/18, and two retired in 2018/19, in the first six months of 2019/20 that number had increased to five.

In Orkney, meanwhile, the number of overtime hours being worked dropped by 37% between 2016/17 and 2018/19 and in Shetland they dropped by 29% over the same period.

It comes at a time when the service is not only experiencing a chronic shortage of consultants, with 480 full-time consultant posts sitting vacant, but is also facing unprecedented demand due to the anticipated impact of the coronavirus.

Eunson added: “We’re in a situation where the NHS needs doctors working at full capacity and right now the tax situation is disincentivising that.”

But the health service is not the only public-sector organisation being impacted by the pension rules.

Figures released by the SPPA show that the number of firefighters paying an annual allowance charge almost doubled from 23 to 44 between 2015/16 and 2016/17, while for employees of Police Scotland the numbers increased fourfold, from 89 to 444.

Craig Suttie, general secretary of the Association of Scottish Police Superintendents, said that only a small number of officers who are at assistant chief constable level and above earn enough to be impacted by the taper. But the bigger issue for the police is how the annual allowance impacts on defined-benefit savers more generally.

Due to the way pensions growth is calculated, using a formula that involves multiplying contributions by 16, a small increase in pay can result in the annual allowance limit being breached in any given year.

That means that even someone on a relatively low pay grade can be hit with a charge as a result of being promoted.

Suttie said: “This is a massive issue for our members. The annual allowance is thoroughly unfair and is now impacting on sergeants and inspectors.”

Calum Steele, general secretary of the Scottish Police Federation, added: “The argument for the annual allowance was that it would target high earners in the private sector, but it doesn’t seem to be meeting its policy objective because it is disproportionately hitting a relatively large number of people who work in the public sector.”

Chris McGlone, Scottish executive council member of the Fire Brigades Union, said those working in the Scottish Fire and Rescue Service are now more reluctant to seek promotion. That is being felt at the most senior level in particular, he said. “I’m not saying the impact is huge, but it is disproportionate,” he said. “We recently advertised for a deputy chief officer and only had two applicants – we would have hoped to have 20 applicants from across the UK.

“We don’t have a massive pool [for those jobs] as it is; to eliminate or restrict that pool further is detrimental to the best interests of the organisation.”

Each of these organisations want Chancellor Rishi Sunak to address the problems they have raised with the annual allowance when he reveals his Budget on Wednesday.

While a number of potential solutions have been suggested, the preferred option appears to be to remove the annual allowance completely for defined-benefit savers.

The Treasury did not respond to a request for comment, but it has been widely reported that the only action Sunak intends to take is to raise the salary threshold at which the taper kicks in from £110,000 to £150,000.

Peter Young, a partner at accountancy firm Johnston Carmichael, said: “The Government will have to do something because it said it would. Let’s hope it comes up with a cure rather than just a treatment for the symptoms.”

CASE STUDY: Orthopaedic surgeon Simon Barker

Simon Barker has spent his entire adult life working for the NHS, performing countless knee and hip replacements in Aberdeen since taking up a post with NHS Grampian in 2006.

Like many of his colleagues, Mr Barker also previously took on several extra sessions a month, working occasional evenings and weekends to help clear waiting-list backlogs.

Due to the changes made to pensions legislation in 2016, however, for the past three years he has been hit with disproportionate tax charges that have effectively seen him pay the Government to take on those extra shifts. As a result, he has not only stopped putting himself forward for extra work, but has cut back his normal working hours too.

“The first bill I got was for a few thousand pounds and it came out of the blue; it was a bit of a shock,” he said.

“I do hip and knee replacements and there’s the ability for us to do more work than we would normally have capacity for. I didn’t realise I was tripping over these thresholds and I ended up paying to do the work for those extra sessions.

“I thought I had to do something about this so I declined all the waiting-list opportunities that came my way. I don’t want patients to wait longer than they have to, but most reasonable people would accept that it’s not fair to expect anybody to pay to do their work.”

While Mr Barker knows how much cash he and his employer contribute to his pension over the course of any given year, in defined benefit pensions like the NHS one the tax-free amount members are allowed to save relates to pensions growth rather than straight contributions.

Due to the way that growth is calculated the figure can be considerably higher than the contributions made and, as the 2016 legislation sees the annual allowance reduce from £40,000 to £10,000 for anyone earning over £110,000, it is easy for higher earners to inadvertently breach their savings limit.

To safeguard himself against any future charges Mr Barker has dropped one session from his normal workload to take his earnings below the threshold at which the taper kicks in. He is also considering cutting back his hours even further.

The problem the NHS is now facing, he said, is that even if the Treasury does take action to mitigate the impact of the pension charges people like him will be unlikely to start working those hours again.

“I now don’t work a Friday afternoon and it’s a nice thing, being at home with my family,” he said. “I have to be honest and say I wouldn’t go back now. This has changed my thinking and time with my family matters more to me than work.”