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

The government is consulting on the pensions annual allowance taper that is wreaking havoc in the NHS. Much better would be to simply abolish it, says Merryn Somerset Webb. And not just for the NHS.

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.

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.

Recommended

Stamp duty holiday extension will keep the house-price party going – for now
Property

Stamp duty holiday extension will keep the house-price party going – for now

The government is to extend to the stamp duty holiday by three months. Good for today’s buyers, says Nicole Garcia Merida, but what happens in June?
26 Feb 2021
The Great Reset: a fresh start or yet another assault on freedom?
Global Economy

The Great Reset: a fresh start or yet another assault on freedom?

The World Economic Forum’s latest big idea is being trumpeted as a new beginning for the global economy. Yet in truth there is nothing new about it – …
26 Feb 2021
How to get the best deal from your pension drawdown
Pensions

How to get the best deal from your pension drawdown

If you're thinking of taking out a pension drawdown plan on reaching retirement, don't just rely on the Money Advice Service’s price-comparison tool.
23 Feb 2021
23 February 1820: the Cato Street Conspiracy unravels
This day in history

23 February 1820: the Cato Street Conspiracy unravels

The Bow Street Runners burst in on the Cato Street conspirators, frustrating their plans to massacre the entire Cabinet, on this day in 1820.
23 Feb 2021

Most Popular

The days when you could get 7% from your bank are long gone – so what do you do?
Bitcoin

The days when you could get 7% from your bank are long gone – so what do you do?

With interest rates at rock bottom for so long, we’ve been forced to move from saving to speculating to earn any sort of return. Dominic Frisby asks w…
24 Feb 2021
Why you should still put money into a cash Isa
Cash ISAs

Why you should still put money into a cash Isa

Interest rates may be lousy, but tax-free saving into a cash Isa is still a good idea.
23 Feb 2021
Are we heading for another bond market tantrum?
Government bonds

Are we heading for another bond market tantrum?

The last time the US central bank tried tightening the purse strings, the bond markets threw a tantrum. With yields now rising, could we be about to s…
25 Feb 2021