The Financial Adviser has reported the extra tax being paid by public sector pensions schemes has doubled since the introduction of the tapered annual allowance. Data obtained by the Financial Adviser has shown how the tapered annual allowance is affecting more public sector professionals than just doctors. Members of four public sector schemes paid £18m in pensions tax through Scheme Pays in 2017-18, as the number of people reaching the annual allowance limit is increasing. This was an increase from £8.9m in 2015-16.
The scheme allows savers to settle annual allowance tax charges of more than £2,000 through the pension fund without needing to find funds upfront. However, individuals who use it will see their benefits adjusted at retirement and will pay interest on the ‘loans’. The use of the scheme is on the rise and is seen as a symptom of the increasing number of people being caught by the tapered annual allowance.
Data from several Freedom of Information requests submitted by the Financial Adviser highlighted that the Teachers’ Pension Scheme saw the highest amount of tax paid through Scheme Pays during 2017-18, at almost £10m on behalf of 393 members.
The data confirmed that the NHS Pension Scheme saw nearly 3,900 members using the facility in 2017-18, but there was a sizeable drop from almost £35m paid through scheme pays in 2016-17 to £3m in the following year.
The tapered annual allowance, introduced in 2016, gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions – for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost and for those earning over £210,000, tax relief is only allowed on pension contributions up to £10,000. Whilst this appears to only affect very high earners, this is not necessarily the case as due to the complicated way in which Defined Benefit pension contributions are calculated, the extra benefits added into pension entitlement are effectively added back into the salary of many senior teachers and doctors who have been caught out. Without ever receiving the very high income that the calculations imply, these individuals have received huge and unexpected tax bills. They may also suffer a lifetime allowance tax charge on their benefits when they retire.
Last month the Department of Health and Social Care unveiled plans to introduce a 50:50 option that would allow doctors to “halve their pension contributions in exchange for halving the rate of pension growth”, this amid concerns clinicians were retiring early or refusing to do extra sessions in hospitals, because of the tax bills they faced.
The Department for Education, the Ministry of Justice and the Ministry of Defence did not respond to a request for comment.
Sir Steve Webb, former pensions minister and director of policy at Royal London, argued that the tapered annual allowance was “one of the most complex features of the tax system and has undoubtedly caused thousands of public service workers unexpected tax bills”.
He said: “Scheme pays is a helpful facility but is not without its problems, especially when the rate of interest on the money borrowed takes a big chunk out of income in retirement.
“This is basically a sticking plaster when what is needed is radical surgery in the form of abolition of the tapered annual allowance.”
For more information about the tapered annual allowance, or to speak to a professional about your financial situation, contact Acumen Financial Partnership today on 0151 520 4353 or email firstname.lastname@example.org.