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Scheme pays under used option for NHS staff set to breach annual allowance

15 May 2019

Fewer than one in 10 NHS staff are taking advantage of the ‘scheme pays’ option when they breach their pension annual allowance, according to wealth manager Quilter. 

A Freedom of Information Request by Quilter showed that on average nearly 17,000 NHS staff breach the annual allowance on pension contributions each year, yet just 1,500 use the scheme pays option where the employer meets the cost.

In 2014/15, when the annual allowance was cut to £40,000, nearly 21,000 NHS employees exceeded the threshold, but fewer than 350 individuals asked the scheme to pay.

The annual allowance restricts the amount pension investors can save tax free in any given year. The annual limit was in excess of £250,000 in 2010/11 but has been dramatically reduced to the current £40,000. According to Quilter, public sector workers are particularly vulnerable to breaching the allowance because of their defined benefit pensions, meaning a pay rise could easily see pension contributions docked under an annual allowance tax charge.

This is particularly problematic for higher earners that are affected by the tapered annual allowance, bringing the maximum pension contribution before taxes apply to just £10,000 per year.

Ian Browne, pensions expert at Quilter, said: “The annual allowance is really complex anyway and then when you add the tapered allowance on top things can get really muddy. It is the consequence of an intricately layered tax system that is in need of simplification.

“The NHS should ensure it promotes the scheme pays option clearly as it seems thousands of eligible members may be unaware it even exists.”

He added: “Public sector DB pensions are under all kinds of pressures at the moment, with separate legal cases claiming age discrimination against schemes that revised benefits down for younger members. If overturned, this could put great pressure on government, which has set aside £30 billion to cover the cost already. Additional complications like processing scheme pays applications just add to the weight of pressure on public sector DB schemes.”