Pension tax pain causing doctors to hang up their stethoscopes early

Doctors are retiring early so that they can avoid costly pension tax bills, according to a survey.

Complex pension taper rules introduced in 2016 are sending doctors to an early retirement, putting the NHS at risk of greater understaffing and leaving patients facing longer wait times.

Almost half (45%) of doctors surveyed by the Royal College of Physicians and its Scottish counterparts say that they have decided to retire younger, with 86% of doctors citing pension concerns as one of their reasons, 

The survey of 2,800 doctors nearing retiring age found in the last two years that 38% of clinicians aged 50 to 65 reported having had an annual pension allowance tax charge owing to exceeding their pension threshold.

Tax bills for pension allowance breaches are becoming much more common since rule changes in 2016 cut the amount that savers can put away each year.

Most individuals can squirrel away up to £40,000 annually, but this amount is tapered for higher earners to as little as £10,000.

The complexity of the taper makes it hard for savers earning more than £110,000 to work out their allowance and stay within the rules.

Members of defined benefit schemes, such as doctors in the NHS pension, are particularly hard hit because their contributions are the result of largely hidden calculations about the future value of their pot.

Breaches to the annual allowance must be paid immediately on money that may be tied up in a pension for decades.

Doctors have reported that these bills can exceed their annual salary, resulting in many of them seeking early retirement or reduced hours to avoid the complications and cost.

Of the senior clinicians surveyed by the Royal College, 62% said that pension tax rules meant they now avoided extra paid work, such as waiting list initiatives or covering for colleagues. A quarter have reduced the number of programmed activities they work.

More than a fifth (22%) reported having stepped down from a leadership or other role with extra remuneration that would trigger a pension tax charge.

One survey respondent says:“As a consequence of taking up a role as deputy medical director, I received £85,000 tax charge. I work harder than ever, took up a senior role and have this. 

“Thankfully, I could pay with [pension] scheme pay otherwise I would have had to sell my house. I believed in the NHS, worked ridiculous hours as a junior, believing in a greater good but now I feel so unvalued and as though it was all an utter mistake.”

Another respondent adds: “I received a £92,000 tax bill due to receiving an ACCEA award, running a regional specialist service and undertaking a leadership role.

“I have had to come out of the pension scheme in my 40s due to punitive projected tax costs and I now work the equivalent of two sessions per week unpaid. I intend to leave the NHS at the earliest opportunity.”

Royal College of Physicians president Professor Andrew Goddard said the findings of the survey demonstrate the need to urgently reform the pensions system in this current tax year to prevent additional pressure on the NHS.

“We simply cannot wait until the next tax year for a solution, every week the issue remains more hard-working doctors will reduce their hours, driving up waiting times for patients and driving down staff morale,” he says.

A government consultation is under way to make the NHS pension scheme more flexible, with changes intended to be implemented in April 2020 that would allow staff to lower their contribution rates to stay within the limits.

This could pave the way for more widespread reforms across other sectors facing similar problems of hefty annual allowance tax bills.

Graham MacLeod, financial planning director at wealth manager Tilney, says: “Such tinkering, while welcome, is unlikely to resolve the crisis without the scrapping of the tapered annual allowance. 

“The costs of addressing this will ultimately need to be offset against the tax receipts to the Treasury arising from these pension tax charges.”

“But with the 6 November 2019 Budget now pulled and a new Budget unlikely until 2020 following a general election, the opportunity to hit the nail on the head and address this issue head-on has effectively evaporated for many months, a period when the NHS pension crisis will rumble on, risking rising waiting lists for surgery.”

This article was first written by our sister magazine Moneywise.

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