A job for the next chancellor: abolish the pensions annual allowance taper

published 24 July 2019

An NHS doctor secures his face mask © Matthew Lloyd/Bloomberg via Getty Images

Good news: the health secretary has launched a 12-week consultation into how it can mitigate the tax nightmare the pension annual allowance taper is causing the NHS. Bad news: it seems very unlikely that it will address the underlying problem.

We have written about this before here. The upshot is that the taper (see below) is leaving an uncomfortable number of clinicians with nasty upfront tax bills on pension contributions they can't access for many years. This is incentivising them to both work less and to retire early.

This is not one of those problems that can be ignored until it goes away: waiting lists are lengthening and lives are at risk. So the fact that a conversation about how to fix it is underway is encouraging. The problem is the limits of that consultation.

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The core idea is the 50:50 option, which allows clinicians to halve their pension contributions in exchange for halving the rate of the growth in the value of their pension. That helps (it would "empower top clinicians with more control to better manage their pensions growth and tax liabilities" says Matt Hancock). But it would still leave the risk of tax breaches pretty high for better paid medical staff.

So the consultation is asking for other ideas as well. And various complicated convoluted fudge ideas have come in.

"Among the ideas already put forward to the health department by medical professionals were giving clinicians the freedom to choose other pensions contribution ratios, for example 25% or 75%; and removing the current annual limits for practitioners who choose to top-up their pension by purchasing "additional pension" later in the tax year, to maximise any remaining headroom in their annual allowance," says the FT.

However, all these are still boring, admin-heavy, complex and risky enough to fail to solve the problem. And the one option the consultation has discounted is the only one that will actually work scrapping the annual allowance and its stupid taper add on.

And not just for the NHS the taper causes horrible problems for the rest of us and the annual allowance is entirely unnecessary as long as the lifetime allowance exists (this limits the total amount you can have in a pension without incurring an additional tax charge).

Better than a complicated retrofit for one group of people would be something different a recognition that the annual allowance and taper are bad policies and a plan to abolish them completely. One for the next chancellor to put near the top of his in box.

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.