All doctors have important decisions to make about their NHS Pension, personal pensions and investments before the end of this tax year in April 2014. This is the second in a series of three articles where we look at the background to the cuts to the NHS Pension. Another article will appear in December. We will be contacting all our clients at the end of this year to discuss what action you need to take to protect your pension assets and make sure you can retire when you want to.
In a dark corner of a Whitehall department, a shadowy group of civil servants have been given a secret task: How to cut doctors pensions? It sounds like a conspiracy fantasy – but is it? The scale, relentlessness and deviousness of the cuts suggest that this idea may not be far-fetched.
The British Government has a big problem: laden under a crushing burden of debt, it must find ways to lighten the load. The load threatens to get even bigger over the next few years. The cash flow shortfall in public sector pensions alone (the difference between pension contributions and the amount being paid out to those who are retired) is estimated to reach £32 billion, and mounting, by 2017. In 2005-6 it was just £200 million.
The Government must cut its expenditure. But how? Politicians prefer to do this in such a way that we hardly notice or understand. They also need to find targets where there will be little public outcry. Doctors who are higher-rate taxpayers are an easy target in an age of austerity and the constant stories appearing in the media about NHS shortcomings help the Government agenda. Attacking doctors pensions allows the Coalition to save money, cut back the public sector and be seen to be ‘bashing the rich’ at the same time.
Not many years ago a doctor innocently joined the NHS Pension expecting to pay 6% of earnings, retire at 60 and receive a pension nearly half final salary. The belief was that the NHS Pension was ‘guaranteed’.
But the Government has a target to cut the total liability of public sector pensions by 40% over the next half century. Some cuts have already gone through. 6% pension contributions have increased to 12% for most consultants and GP’s. Top contribution levels could soon hit 14.5%.
In April 2011 the index-linking protection against inflation was cut back. NHS Pensions used to be linked to the Retail Price Index (RPI), a more generous measure of inflation. Now it’s the Consumer Price Index (CPI, or ‘Cutting Pensions Index’) which omits items like housing or heating costs and therefore doesn’t go up as much. The Office of Budget Responsibility recently forecast that RPI will be running at twice the rate of CPI by 2016. This will cut the average doctor’s pension in retirement by about 15%. It was also retrospective so it affects doctors already drawing their pensions.
From April 2014 the Lifetime Allowance, the amount you can hold in pensions without being hit by punitive tax, will drop from £1.5 million to £1.25 million. It is estimated that around 75% of the 12,000 public sector workers drawing pensions of over £50,000 per annum are retired doctors, and this is (surprise, surprise) the level of pension which will be hardest hit by the reduction in LifetimeAllowance. It is inconceivable that the Government were oblivious to the impact on doctors pensions when they made the decision to reduce the limit.
Meanwhile the Government still plans to make massive cuts to the NHS Pension in 2015. The current pension will stop and doctors will be invited to join a new pension with a retirement age up to 67 or 68 depending on when you qualified. It will not be based on final salary but on career-average earnings, meaning a big reduction in pension benefits for consultants of up to 30% compared to the final salary calculation method. Harsh penalties will deter drawing pensions before these ages. The old, existing NHS Pension should be safe and available at age 60, if you believe the Government’s promise.
But the ages of 67 and 68 could be over-optimistic for some doctors. In the future the NHS Pension normal retirement age will be linked to the state pension age. But the Government is already planning new laws linking the state pension age to (increasing) life expectancy. Within a generation, should life expectancy continue increasing at the current rate, normal retirement could be over age 70. Taking the lead from the formula in social-democratic Norway/Sweden, this politically sensitive issue need not be re-visited every year. (In Norway you get a bigger pension if you delay retirement to age 75). Doctors will appreciate the irony that their success in making people live longer is pushing back their own retirement date.
But even this long list of cuts will probably not be enough. When the deal between the Government and unions is finalised, expect to hear both parties proclaiming a deal which is “sustainable”. It will be nothing of the sort. It looks like Lord Hutton, architect of 2015’s planned cuts, under-estimated the costs of public sector pensions by using life expectancy figures that are six years out of date and assuming the economy would actually grow rather than stagnate since 2007:
“What we’ve seen is how very quickly the assumptions which underpinned my assessments of the long-term sustainability of public service pensions have been shown to be too optimistic.” (Interview BBC Radio 4 ‘World This Weekend’ 4 December 2011).
And in anticipation of future costs going up, the Government has been careful to build into any agreement with the unions a cost ceiling for the taxpayer’s contribution. This will inevitably mean increasing costs for members of the scheme in years to come.
So what further cuts could happen? First of all, tax relief. It’s still very generous to higher-rate taxpayers with the Government paying 40% of pension contributions. But this means the 8% of taxpayers who earn over £50,000 per annum get half all the available tax relief. Interestingly around 40 Tory MP’s in marginal seats are calling for the abolition of higher-rate tax relief. The Pension Policy Institute is also calling for the tax-free lump sum to be restricted.
Secondly pensionable salary could be capped – an idea already introduced at the BBC pension. Thirdly the Government could bring in an alternative defined contribution pension, where money is invested and returns are not guaranteed. This will be marketed as a flexible escape route for those who find the increasing contribution levels in the main NHS scheme unaffordable. It is now the main type of pension in the private sector.
Fourthly further changes to indexation could occur with further measures to erode inflation protection. Last week the Government announced proposals to allow private sector companies to opt out on paying annual inflation increases to members of final-salary schemes. This is a truly frightening proposal and the danger is that what happens in the private sector today will feed into the public sector tomorrow.
Inflation may turn out to be the key Government weapon. Western governments have used inflation since the Second World War to reduce the real value of savings. If the Government can succeed in cutting back inflation protection, all it then needs to do is step on the inflation pedal by printing more money. It then sits back and waits for real pension income to drop. Perhaps this is the mandate that has been given to new Governor of the Bank of England Mr Mark Carney.
Next month we will look at what doctors can do to protect themselves from the effects of all these cuts.
If you are a client of Financial Therapeutics, we will be contacting you later this year to discuss the reduction in the Lifetime Allowance for Pensions and whether you should seek protection from this. You are also welcome to forward this email on to other doctors who may be interested.
If you are not a client of Financial Therapeutics and you need advice about the NHS pension and your pension planning (highly recommended!), please contact me on 07771 651231.
David Bowker
Financial Therapeutics is a trading style of Financial Therapeutics UK Ltd.
34 Park Cross Street, Leeds, LS1 2QH.
Financial Therapeutics is authorised and regulated by the Financial Conduct Agency.
