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

How to prepare your business for Brexit
Small business

How to prepare your business for Brexit

Whether we have a Brexit deal or not, new procedures for importers and exporters will apply from 1 January. Get your business ready now.
27 Nov 2020
Are central banks about to start targeting house prices?
House prices

Are central banks about to start targeting house prices?

New Zealand’s finance minister has suggested expanding the remit of its central bank to include an oversight of house prices. John Stepek explains why…
27 Nov 2020
27 November 1967: Charles de Gaulle vetoes Britain's entry to the EEC
This day in history

27 November 1967: Charles de Gaulle vetoes Britain's entry to the EEC

On this day in 1967, French president Charles de Gaulle vetoed Britain's attempt to join the European Economic Community, claiming Britain didn’t agre…
27 Nov 2020
The “economic emergency” isn't nearly as bad as it could have been
UK Economy

The “economic emergency” isn't nearly as bad as it could have been

If you listened to Rishi Sunak’s Spending Review, you might be feeling a little down. But don't worry too much. Things might not be anywhere near as b…
26 Nov 2020

Most Popular

The next 20 years: five new technologies on the horizon
Global Economy

The next 20 years: five new technologies on the horizon

What will everyday life be like in two decades’ time? Matthew Partridge peers into his crystal ball.
12 Nov 2020
This week’s rally in value stocks is just the beginning
Value investing

This week’s rally in value stocks is just the beginning

The arrival of a vaccine this week saw huge gains in the markets and investors switching out of big-tech growth stocks and into “value” stocks in more…
13 Nov 2020
Share tips of the week
Share tips

Share tips of the week

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
13 Nov 2020