Huge pensions boost as Jeremy Hunt considers raising tax-free limit

Sir Peter Bottomley MP slams 'appalling' pension decision

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Jeremy Hunt is considering allowing workers to save more into their pensions each year tax free to stop an NHS exodus of older doctors. Senior health professionals are quitting after being hit by financial penalties for working overtime or being promoted.

Increasing the £40,000 a year limit, which can be far lower for higher earners, is one option for encouraging the over 50s back into work. 

Experts say changing the annual allowance regime could have a “major impact” on retention of doctors but changing it for everyone would be a waste of money.

Treasury insiders said the option was “on the table” for the March budget but stressed the Chancellor is “worried about the potential cost”.

But the government believes holding on to more senior doctors would also help bring down NHS backlogs built up during the pandemic.

That could also boost growth by reducing the time it takes to treat adults who cannot work while they are waiting for treatment for ill health 

Ministers are already looking at the lifetime allowance, which is set at £1 million, but changes to the annual limit is the key reform doctors’ representatives want.

BMA pensions experts say changing the “desperately unfair” yearly limit would make the biggest difference in dealing with retention of doctors.

Workers have to pay income tax on the amount they pay into their pension pots above the £40,000 threshold.

There is also a “taper” that hits high earners and significantly reduces the size of the annual allowance.

Ex-pensions minister Sir Steve Webb, partner at pension consultants LCP said: “There is no doubt that there are some senior doctors who have retired or considered retiring because they have faced big pension tax charges.  

“A targeted measure to deal with this issue could have a major impact on NHS recruitment and retention.  But there is very little evidence that a general increase in tax-free limits for all workers would make much difference to decisions about retiring or coming out of retirement, and this money could be better spent on more effective measures to get the over 50s back to work”.

Mr Hunt will only push ahead with changes if enough progress has been made on key economic targets, such as halving inflation.

If figures later this month show inflation is still in double digits, then it is unlikely there will be any significant measures taken in the budget.

Ranil Jayawardena, former Cabinet Minister and founder of the Conservative Growth Group that has been campaigning for changes to the pension tax trap, said: ”Quick wins like this help our NHS and pay for themselves. 

“Lifting – or scrapping – the lifetime and annual allowances will mean more experienced doctors in the NHS, patients get seen more quickly, fewer locums are needed, and people are able to return to work later in life. 

“This is the sort of targeted measure that we need now to get Britain growing, cut the backlog in the NHS, and improve the lives of families across the country.

Around 56,000 doctors breached the £40,000 limit last year, up 68 per cent in 12 months.

Dr Vishal Sharma, chair of the BMA pensions committee, said: “Before Mr Hunt was Chancellor he quite rightly called the current NHS pensions situation a ‘national scandal’. 

“Whilst it is positive that the Government is looking to address some of these issues, it is critical that it implements the correct solutions. Increasing the annual allowance would only go so far in addressing the punitive taxation rules that are leaving senior doctors with little option but reduce hours or retire early.

“If he truly does grasp the severity of the situation, he will need to address the root cause of the problem. 

“He urgently needs to amend the Finance Act, to address defects that result in doctors paying tax charges on non-existent negative growth and implement a tax unregistered scheme like the one introduced for judges last year. 

“This would be the simplest and most cost-effective way to end this injustice and keep doctors in the NHS. Retaining the brilliant senior workforce we have will be crucial to tackling the horrific NHS backlog – the chancellor must seize the chance of this budget before it is too late.”

The Institute for Fiscal Studies released a report last month calling for a substantial increase in the annual allowance.

It said: “There is good reason to doubt the usefulness of a limit on the amount an individual can contribute to a private pension in a single year. 

“With a more rational tax treatment of pensions – and in particular one that limits the extent to which those who are not at risk of undersaving for retirement are able to receive an effective tax subsidy on additional pension saving – then the case for a constraining annual limit would be reduced further. 

“We therefore recommend that it is made much more generous so that fewer people are affected.”

Baroness Altmann, a former pensions minister, said: “The way the annual allowance works needs a radical overhaul. 

“It is far too complicated and has been stuck at current levels for years. 

“Also, the high inflation levels we are seeing now make it unfair for many senior staff who are penalised by the way the complex calculations work.”

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