SENIOR level public-sector workers are being warned to seek advice regarding potential tax liabilities after it was revealed that armed forces personnel have been caught in the same pension trap as senior NHS doctors.
As has been widely reported over the course of this year, NHS consultants have been shunning the extra shifts needed to keep the health service functioning because complex pension rules introduced in 2016 have resulted in them effectively having to pay the Treasury to do that work.
A Freedom of Information request from financial services business Quilter has revealed that members of the Armed Forces Pension Scheme have also been affected, with 3,840 people breaching their annual tax-free savings limit in 2017/18. While that is down slightly from the 3,920 who breached the limit during the previous year, it represents a near fourfold increase on the number affected in 2015/16.
READ MORE: NHS faces staffing crisis over pension charge fears
Major General Neil Marshall, chief executive of the Forces Pension Society, said that as a result - and as with the NHS - the fear of being hit by disproportionate charges is starting to have an impact on the decisions being taken by those working for the British Army, Royal Navy and Royal Airforce.
“I have no absolute evidence that senior officers are turning down promotion, but what’s very clear is that people at mid-ranking as well as senior levels are looking at the pension tax as part of the calculus when considering whether to remain committed to the armed forces or not,” he said.
“They are thinking ‘do I stay in and continue to strive for relative marginal gains or do I leave the armed forces and have more flexibility as to how I build my pension?’.”
It is a problem that Andrea Sproates of financial advisory business Chase de Vere believes will have an impact right across the public sector, with anyone earning £110,000 or more a year and contributing to a defined benefit pension likely to be affected.
“Although only senior management or people with external income are in a position where they could be affected, all public sector schemes have very similar rules,” she said. “The only solution is for each person to seek financial advice [on whether they will be affected] because until the legislation changes - if the legislation changes - I don’t think there’s a one-size fits all solution.”
The problem has arisen as a result of legislation that was supposed to stop the wealthy benefiting disproportionately from tax breaks designed to encourage pension saving, with the tax-free amount that can be saved into a pension each year tapering down from £40,000 to £10,000 for higher earners.
READ MORE: NHS pension plan could create more problems than it solves
The issue senior doctors have encountered is that taking on extra shifts has resulted in them inadvertently breaching the limits and, due to the complex way the resultant charges are calculated, some have had to pay many thousands of pounds more in taxes than they have received in overtime pay.
With senior practitioners shunning extra shifts or retiring as a result, the Government has begun looking at ways of solving the problem. It is currently consulting on a number of measures, including allowing “top doctors, surgeons and other high-earning clinicians” to alter the amount they save into their pension while retaining their employer’s full contribution.
That has not gone down well with doctors’ groups such as the British Medical Association, which would like to see the taper scrapped altogether.
Major General Marshall agreed that “the right thing to do would be to scrap the taper for everyone”, but noted that the fixes being considered for NHS staff should apply across the whole of the public sector.
“If the solution is greater flexibility for the NHS then at the very least the same opportunity should be offered to Defence Medical Services personnel,” he said. “But from my perspective public service is public service and public servants are remunerated for what they do and what they contribute.
“A number of public servants have committed to the military over their entire adult lives, but as they have started to reap more financial rewards in terms of increased pension pots they have been penalised for remaining loyal, committed and successful.
“Everyone realises that they have to pay taxes - that’s not the rub. The rub is fairness, and this is inherently unfair.”
READ MORE: Government’s latest pension fix is not the solution the NHS is looking for
Quilter financial planner David Gibb agreed that the Government must find a solution that would work across the public sector, noting that it would be wrong to offer concessions to NHS employees only.
“Government ministers seem determined to try and keep the tapered annual allowance in place and create workarounds in public sector schemes,” he said.
“This is the wrong approach and the Treasury should scrap the taper altogether as a matter of urgency.”
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