More Public Sector Physicians May Leave the Service Due to Lifetime Allowance Changes

Changes in the Lifetime Saving Allowance may see medical professionals and other high-salaried public sector employees leaving their final-salary pension schemes early in order to avoid paying more in taxes. The Lifetime Allowance is set to be reduced from the current £1.8 million to £1.5 million starting from 6 April 2012, meaning that retired and retiring public servants would be hit with additional tax charges of 25% if the pension is taken as an income or 55% if the pensioner accepts a lump-sum payment.

Making the situation worse is planned increases in contributions to public sector employees’ pension schemes. While all public sector employees are seen to be affected with increases averaging 3pc of salaries doctors are seen to be the worst affected. Doctors who are at present paying 7.5pc to 8.5pc could end up contributing as much as 13pc to 15.5pc by 2014-15. The increases were expected in the wake of the government’s acceptance of Lord Hutton’s review of the public sector pension scheme, which also included recommendations such as an increase in the retirement age for some pension plans as well as for final-salary pensions to be changed with career-average schemes.

Those whose pensions already exceed the £1.5 million lifetime allowance need to leave before April, when the new rules take effect, in order to avoid the 25% penalty charge; if they stayed they would face extra tax charges of £75,000. This is why most doctors, dentists and other highly-paid members of the NHS are already being advised to leave the final-salary pension plan to avoid breaching the lifetime allowance level, something that was unthinkable in the past. But the increased tax bill they face make leaving the most attractive option, In fact, many health professionals have even considered taking early retirement and leaving public service entirely.

Those who have only a few years to go before retirement are the ones who are seen to benefit the most from leaving the pension plan. But even younger public-sector employees will enjoy only marginal benefits, at best, from remaining in the pension scheme not just because of the increased contributions they are being required to make but also because of a recently-introduced cut in the annual allowance limit for tax advantaged pension contributions, reducing it to just £50,000 from the previous £255,000. This means that any public-sector employees who get pay increases will see their tax bills soar. The ultimate effects of these changes could be a decline in public health care due to the loss of experienced practitioners.

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