The government has confirmed that it will not be proceeding with pension flexibility proposals in relation to the NHS Pension Scheme, arguing that the incentive to take on additional NHS work was “restored” via an increase in the earnings threshold.

In its response to the consultation, NHS Pension Scheme: pension flexibility, the government argued that the tax solution to address the taper issue was the “simplest to understand and administer”.

As such, it confirmed that the it does not intend to proceed with proposals to introduce pension scheme flexibility for senior clinicians, which means that the flexible accrual facility will no longer be introduced and said there was no longer a need for employers to offer contribution recycling.

Instead, the government has highlighted existing changes already made to the tapered annual allowance thresholds, with the March 2020 Budget having introduced a £90,000 increase to the thresholds, which was effective as of 6 April 2020.

This was hoped to ease the problem of high earning NHS staff cutting their hours by providing them with a tax boost, with NHS providers previously warning of a potential "exodus" of NHS leaders due to the tax issues.

However, industry experts at the time warned that these plans could represent a "sticking plaster" solution, with the British Medical Association calling for "fundamental pension taxation reform".

Indeed, the government's response acknowledged that respondents to the consultation had offered suggestions for reform to the lifetime and annual allowances, with the aim of simplification, such as the removal of the taper.

However, it emphasised that raising the thresholds has removed up to 96 per cent of GPs and 98 per cent of consultants from the taper calculations based on their NHS income, since its introduction.

It also emphasised that these measures apply to all staff and the NHS more broadly, as well as the wider public sector, with only a “limited number of the very highest earners” still remaining in scope.

Furthermore, it said that whilst such members may still receive a tapered annual allowance breach, they will have £90,000 additional headroom before the charge applies and they will be assessed against a higher adjusted income.

It stated: “The incentive to take on additional NHS work is now restored, and from 6 April 2020 clinicians can earn at least an additional £90,000 before reaching the new threshold income.

“This is a £2bn commitment over the scorecard period that supports clinical staff and has been welcomed by the NHS and representatives of the medical profession.”

In explaining the lack of broader flexibilities or reforms, the government highlighted concerns amongst consultation respondents, stating that an increase in the thresholds was preferred by most consultation respondents as a a simpler alternative to flexibility, who feared it would add to the complexity of the pension scheme.

Indeed, the BMA for instance, warned in its response that the taper mechanism is "beyond the comprehension of the most experienced accountants and tax advisors".

This view was supported by a "large number" of public respondents, who argued that it should not be so difficult to make an accurate estimate of pension tax liability, which it acknowledged was "currently challenging" without taking formal financial advice.

Previous industry research has also warned of a lack of understanding, with 43 per cent of NHS employees reporting a low understanding of the allowance, and 75 per cent of GPS unsure on the lifetime and annual allowance.

In addition to this, it noted that respondents had also raised concerns around increasing the administrative complexity of the scheme, stating that the tax solution implemented therefore removes the need to introduce "an additional layer of complexity”.

However, it stated that employers are nonetheless encouraged to think flexibly about ways to support the small number of “very high earners” who are still within scope of the tapered annual allowance, and also staff who have breached the lifetime allowance.

It also emphasised that the government is “committed to improving the availability of high-quality information” to allow scheme members to better understand their pension tax liability, recently commissioning NHS employers to provide a ready reckoner tool to help pension scheme members understand their pension growth in more detail.

The government also acknowledged that responses to the consultation had outlined arguments for providing flexibility to to all staff irrespective of tax position, in particular to improve affordability and participation amongst lower earning staff.

However, it stated: "The government provides a rightly generous pension scheme for hard-working NHS staff to save for their long-term financial security in retirement.

"The tiered design of employee contributions is geared to provide lower earners with a discounted rate to encourage participation."

Furthermore, in relation to scheme data highlighted by respondents, which showed that higher opt-out numbers are higher for lower earning staff, the government argued that it was not helpful to compare total numbers, as the scheme has a much larger population of lower earners.

Indeed, it highlighted scheme participation rates using data from the Electronic Staff Register (ESR) which found that scheme membership remains high across all staff groups, with around 9 in 10 staff participating in the scheme.

Commenting on the government response, Quilter NHS pension expert, Graham Crossley, stated: "These issues should not be underestimated as they mean that some doctors are refusing overtime or retiring early to avoid hefty tax bills.

“Changing the annual allowance will not solve the issue. In fact a number of effected doctors may feel compelled to continue to risk their family finances.

"We’ve heard instances of some regular opting out and in of the scheme to manage their pension growth, this is far from a good outcome.

“It is shameful that doctors are continually charged absurd tax on their pensions for doing their job and Government are not acting.”

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