Could the Pension Contribution Alternative Reward Policy help you navigate a path through the dangers of the pension tax system?
Doctors and other NHS Pension Scheme members are still waiting for the Government to respond to calls for an overhaul of the pension tax rules causing them so many difficulties. But there is already some help potentially at hand, in the form of new guidance for NHS employers from the British Medical Association. Its Pension Contribution Alternative Reward Policy sets out one way to mitigate the risks of NHS Pension Scheme members being hit by tax charges for breaches of the annual or lifetime pension allowances.
The BMA policy, which came into effect on 1 April, aims to alleviate the pressure on those active members of the NHS scheme who may in future face higher tax charges because the value of employer and employee pension funding takes them over the annual or lifetime allowance. These charges may be significant, prompting some doctors to consider opting out of the NHS scheme or to reduce their working hours (or even to retire earlier than expected), in order to avoid breaching the caps.
NHS trusts do not have to adopt the BMA policy – they could also opt to amend it before implementation – and it would not form part of staff employment contracts. But for NHS employers facing operational difficulties because senior staff worried about pension taxes are seeking to reduce their contractual hours or turning down additional work or management responsibilities, the policy could provide valuable assistance.
What the policy is worth
The basic principle is that staff potentially facing an annual or lifetime allowance NHS pension tax charge should be able to opt out of the NHS Pension Scheme and receive a separate cash payment rather than a pension contribution from their trust. The policy is available to all staff, including those who have already chosen to opt out of the NHS scheme, though no retrospective payments will be made.
Assuming your NHS employer has adopted the BMA policy, if you’re currently an active member of the NHS Pension Scheme and will be affected by the annual allowance or lifetime allowance, you have two choices. You can stay in the NHS scheme and bear any additional tax charges that arise, or you can opt out of the scheme and receive a separate cash payment.
Those who choose to opt out become deferred members of the scheme. They will also be prevented from making any additional voluntary contributions into their NHS pension pots.
The separate cash payment will be worth what your trust would have paid into the NHS Pension Scheme on your behalf if you’d opted to stay in, minus its employer’s national insurance contribution on this money (this ensures the policy does not have cost implications for the trust). The cash is paid as a supplement to your salary.
Should you opt out of the NHS Pension Scheme?
Whether or not to opt out of the NHS Pension Scheme and take the separate cash payment instead will be an individual choice. You’ll be responsible for obtaining the information and advice you need to make the right decision.
Help is available from several sources, including information from the NHS Pension Scheme itself, as well as professional organisations, unions and bodies such as HM Revenue & Customs. For most people it will make sense to take professional advice from an accountant or independent financial adviser with specialist expertise on how the NHS Pension Scheme works.
The decision will depend partly on your potential tax position in and out of the NHS Pension Scheme – whether the taxation charges mitigated by opting out of the scheme and the alternative cash received outweigh the pension benefits you will forego. It is worth noting that if you opt out of the NHS Pension your taxable income will increase as you will no longer be paying your NHS pension employee contributions which are typically 13.5% or 14.5% of your pensionable earnings. Equally if you do receive a separate cash payment from your NHS employer, again this will increase your taxable income and will also affect your threshold and adjusted income. These calculations are complex and need to be considered before a decision to opt out of the pension scheme is taken.
Bear in mind that opting out of the scheme may also reduce your entitlement to other benefits such as ill-health and lump sum-on-death payments. This should form part of your decision-making process.
If you do decide to explore the separate cash payment arrangement, check with your NHS employer’s human resources department to see whether it has adopted the BMA policy. If you’ve already opted out of the NHS Pension Scheme, you may still be eligible to apply, though only for payments going forward. Again, you’ll need to check with your NHS employer’s HR team.
Once you’ve checked the NHS employer’s position and checked your eligibility, you will need to submit a formal request to change your current pension arrangements. HR should give you a request form that you must complete and submit, along with any evidence requested, to go ahead.
Content correct at time of writing and is intended for general information only and should not be construed as advice.