High Inflation brings NHS pension issues back into focus

The problem had been building since the introduction of the tapered annual allowance in 2016/17 which potentially reduced the annual allowance for anyone with Threshold Income of more than £110,000 – directly in the earnings range of many senior hospital doctors and GPs. The BMA, the main union representing doctors, managed to create enough political pressure that all the main political parties pledged to try and resolve the issue in their 2019 election manifestos.

Of course, the Conservative Party won the election and their solution to the issue was to substantially increase the tapering limits with both Threshold Income and Adjusted Income increased by £90,000 from tax year 2020/21. This removed the tapering issue for many senior clinicians but didn’t resolve the fact that many were still regularly exceeding the standard £40,000 annual allowance. However, for obvious reasons doctors have been focused on other things for the past couple of years and there has been relatively little campaigning pushing for further solutions.

However, the large spike in the inflation rates has brought the issue back into focus. The BMA have highlighted an issue with the way pension inputs are calculated and the workings of the NHS scheme. Whilst HMRCs pension input calculation aims to provide an inflation offset, the inflation rate used is the figure to the September in the year before the start of the tax year. However, benefits are increased based on earnings and or inflation in the current year. Where inflation is relatively stable then this isn’t really a problem. Where it is widely fluctuating it can cause serious annual allowance problems.

It is a particular issue for GPs who’s benefits in the older sections of the scheme receive a percentage of their dynamized lifetime earnings. The lifetime earnings are revalued by the inflation rate in the tax year plus 1.5%. This could mean that the total benefits accrued may increase by over 10% in the current year with the inflationary offset used in the pension input calculation just 3.1%. This may create very high inputs and could be well in excess of the annual allowance for many GPs.

Technically it could also be an issue for all members of the 2015 scheme as the pension accrued is also revalued each year by inflation plus 1.5%. However, due to the McCloud rectification most members will be effectively starting their accrual from zero in this section of the 1 April 2022 meaning high inflation rates shouldn’t directly impact inputs this year. However, it may well cause problems in future years if changes aren’t made.

Added to this, the way the pension calculations work means that if in later years the reverse occurs, there would be no option to offset a large annual allowance in the current year with a negative pension input in the next year as the minimum input is zero. In addition, the carry forward rules don’t allow individuals to offset an excess in the current year against available allowance from a future year.

The BMA are arguing that the inflation rates should be aligned meaning that only the true above inflation increases will be subject to the annual allowance, as the rules intended. This seems a reasonable solution though there is of course the problem of implementing the change. Whilst the impact may be the most significant in the NHS scheme the issue will be felt much wider, especially if earnings start to increase in line with inflation rates.

The BMAs wider aim is less likely to be successful. They are pushing for an unregistered top up scheme similar to the one offered to Judges. This would be extremely costly and raise issues of fairness for all NHS employees. However, it will depend on how much political pressure the BMA manage to create this time around.