What the Chancellor’s Budget announcement means for your NHS Pension

These changes will have significant and largely positive implications for members of the NHS Pension Scheme but will require many to review and rethink pension and retirement strategies.

When combining these changes announced today with further recent developments within the NHS Pension Scheme itself – including CPI alignment, new Retirement Flexibilities, and McCloud updates – there is a lot to consider.

Lifetime Allowance

The Lifetime Allowance (LTA), the limit on the total amount of pension benefits you can accrue in your working life without suffering tax charges upon retirement, has been abolished by the Chancellor.

The LTA has been frozen since April 2020, bringing an ever-increasing number of doctors into this “tax trap”. This has led many to reduce hours via the Retire and Return option, decide to stop building Pensions by leaving the scheme, or leave the medical profession altogether.

This welcome change will come into effect from 6 April 2023 and will mean that medical professionals will no longer face the threat of a significant tax charge if their pension exceeds £1.073m. For some close to retirement, it will be a direct and potentially significant increase in their retirement income position.

The Labour party though has stated they will reverse this legislation change if elected but have clarified that they would need to address the pension tax issue in the context of the NHS, so have acknowledged specifically that plans would be put in place for NHS doctors.

Annual Allowance

The Annual Allowance, the limit on the amount of pension growth individuals can achieve each year, has increased from £40,000 to £60,000.

This change will take the vast majority of doctors outside of the scope of Annual Allowance tax charges in most years. Only doctors with pensionable pay of c. £150,000 and above would find their pension growth regularly close to a £60,000 Annual Allowance.

The tapering of the Annual Allowance remains and will continue to affect those with income over £200,000, with their Annual Allowances reduced on a gradual basis. This legislation has led to sizeable tax charges for those highest earning doctors who have remained within the NHS Pension Scheme and encouraged many others to either opt out of the scheme or retire early. Whilst relatively few doctors are now caught by the tapering rules, choosing not to abolish this awkward tapering legislation feels like a missed opportunity to give people more certainty and less complexity surrounding their NHS pension position.

There was also an issue in that each section of the Pension Scheme was assessed separately for Annual Allowance purposes which meant that some doctors were being assessed for charges which exceeded their overall growth in benefits. The budget addresses this by moving to a calculation basis that aggregate growth across all sections of the scheme.

In addition to today’s Budget announcements, there have been other recent announcements that are more specific to the NHS Pension Scheme including:

CPI and rising inflation

The government has announced that it will tackle the Annual Allowance problems that have been caused by a misalignment of CPI figures and rising inflation. This will be achieved by effectively having no CPI escalation in NHS pension benefits (GPs and 2015 Scheme members) in the 2022/23 tax year for members of the scheme in England & Wales. A similar proposal has been made in Scotland and we are waiting for final confirmation that the rules will follow those in other parts of the country.

The usual escalation of benefits in line with CPI will take place on 6 April 2023 (2023/24 tax year). This will correct a long-standing issue in the scheme and should help create greater predictability and visibility of an individual’s annual pension growth positions, ultimately leading to lower growth figures for most for 2022/23.

Retirement Flexibilities

The NHS Pension Scheme has announced the introduction of two options over the next six months, creating more flexibility for people wanting to access their NHS pension whilst continuing to work within the NHS.

One option, Retire and Re-join, allows individuals to take their 1995 pension whilst continuing to build up their 2015 Scheme pension. The other, Partial Retirement, will enable people to take a part of their pension benefits whilst continuing to work. Coupling these changes with the abolition of the Lifetime Allowance, retiring medical professionals will now have much greater freedom over how and when they retire and take the pension.

We already knew there were changes with the McCloud discrimination case, but we now have new legislation in place alongside which means the NHS Pension Scheme is looking much more positive that it has done in recent years.

What needs to be considered?

The budget was far reaching in terms of addressing the issues impacting the workforce in the NHS. However, all of these changes create further considerations for individuals and emphasise the need for specialist NHS Pension advice that ensures their NHS Pension aligns with their long-term financial objectives. Some considerations include

Do those who have opted out of the scheme now need to revisit that decision?
Can doctors increase their sessions worked without being concerned about pension taxation?
Do people about to retire need to revisit the retirement date to ensure benefits are maximised?
What should those earning more than £200,000 do and are there uses for Limited companies to help plan?
Should certain doctors now be looking at contributing to private pensions to utilise their available allowances and maximise their tax positions?

Watch our NHS Pensions webinar – Wednesday 22 March

Watch our webinar and live Q&A session held on Wednesday 22 March. During the session, our team explored the changes to the Lifetime Allowance and Annual Allowance announced in the Chancellor's Spring Budget.