The Daily Telegraph - Saturday - Money
Middle earners in pension tax revolt
Public servants across Britain are revolting against pension rules they say punch holes in front-line health, justice and emergency services in a bid to get the Chancellor to improve rather than cut tax relief in next month’s Budget.
More than 20 bodies representing tens of thousands of middle earners in the Armed Forces, police and prison and fire services have united to lobby the Government to change the taxation of pensions.
Philip Hammond, the Chancellor, is gearing up to deliver his Budget on Oct 29. Ringing in his ears is a call from the Treasury Select Committee to cut the amount that savers can put into their pensions each year, thereby saving the Government some of the £24.1bn it is forecast to forgo in tax relief this year.
But the group of 21 employee bodies said penalties that once affected only the highest earners now hit those on more modest incomes of around £50,000 a year after six cuts to pension tax relief limits in the past eight years.
Those who are in defined benefit pension schemes are particularly affected, but all high-level savers can be caught.
Andrew Hopkinson, national secretary of the Fire Leaders Association, which is heading the campaign, said: “Nurses, police, firefighters, dentists, civil servants and the Armed Forces are being hit by large tax charges running into thousands of pounds, often simply by remaining in their pension scheme.”
“To avoid these recurring tax charges key staff in vital public services are not working extra shifts, declining promotions, or leaving.”
In the firing line is the £40,000 limit on the amount that savers can add to their pensions each year with the benefit of tax relief. Savers who breach this annual allowance must pay a tax charge of 20pc-45pc, depending on your marginal rate.
Campaigners argue that the way pension growth is calculated in defined benefit schemes means savers can exceed the allowance just by being long-term members or working regular overtime.
The annual allowance has fallen from £255,000 when introduced in 2006-07 to £40,000 since 2014-15. A “carry forward” system allowed unused allowances from the previous three years to be rolled over, softening the initial blow. But 2018 marks three years of the annual allowance being £40,000 and pension savers are now bumping up against the limit.
HMRC multiples the annual growth of your defined benefit pension by 16 when testing against the annual allowance, another factor pushing people over the limit; before 2011 savings were multiplied by 10.
Senior staff and those with more than 20 years’ service are most likely to face an annual allowance penalty.
Growth is calculated by finding the difference from the year before. In an example provided by the Civil Service Pension Scheme, assuming accrued benefits at April 5 2017 of £10,000 and multiplying by 16 gives growth of £160,000, plus the scheme’s automatic lump sum on retirement of £30,000, bringing the total to £190,000.
This is then subtracted from the April 5 2018 figure (in this example, £15,000 multiplied by 16 to get £240,000, plus a lump sum now at £45,000, to get £285,000). This gives annual growth of £93,100, more than twice the £40,000 allowance.
Guidance from the British Medical Association warns that NHS staff “with long service and or significant promotional pay rises” are most likely to be affected.
Pension savers are not allowed to avoid an annual allowance charge by requesting a refund of contributions. If they do, it becomes an unauthorised payment and is taxed at 55pc.
Individuals can be left to find the money to pay penalties for breaches themselves every year they occur. In certain circumstances they can elect for their pension scheme to pay the resulting charge from their pension savings, known as “scheme pays”.
Mr Hopkinson said: “Penalties are often recurring and while scheme pays is an option, many see the reductions to their pension as unpalatable.”
All of those in the working group “fully accept the need to pay a fair level of taxation”, he said.
“We are seeking to improve flexibilities in the various pension schemes to help individuals and employers better manage their pension and personal tax liabilities,” he added. “It is absolutely not about tax avoidance but enabling employers to recruit and retain vital staff.”
Telegraph Money has previously disclosed how pension tax rules may be increasing NHS waiting times.
Dr John Miller, a consultant who has worked for the NHS in the UK, abroad and in the Forces, said his peers were giving up extra clinics and refusing overtime because the highest earners had their allowance tapered even further to £10,000.
He said: “A small increase in pay could lead to an exaggerated tax bill a year later. A £3,000 pay lift might result in a tax bill of £10,000.”
A Treasury spokesman said: “We want people to save into a pension, which is why we allow the majority to make contributions tax-free. Those who incur a tax charge pay income tax on contributions that exceed the annual allowance, as they would for any other income.”
Radical proposals to let employees choose where their company pension is held are being discussed by the Government and senior figures in the pensions industry, writes Sam Brodbeck.
Guy Opperman, the pensions minister, is to attend a meeting next month organised by representatives from several pension firms, including Hargreaves Lansdown, Britain’s biggest broker, to discuss plans that would allow savers to pick their own workplace pension provider, Telegraph Money understands.
Hargreaves has been lobbying the Government to amend pension rules that currently mean employees’ workplace savings are held by the provider chosen by their employer.
Letting staff pick their own firm, the stockbroker argues, would boost engagement with pensions and, it claims, prevent a build-up of millions of “lost pension pots”.
If implemented, savers would be given access to a far greater range of investments.
The meeting is due to go ahead despite the Department for Work & Pensions appearing to shoot down suggestions of changes to the existing “auto-enrolment” model. In the Government’s response to an MPs’ inquiry into pensions costs and transparency, it said the proposal was “not an immediate priority”.
Tom Selby of AJ Bell, a fund shop, said giving staff a choice over their provider would “increase the incentive for workers to pay attention to their pension”. A spokesman said the Government’s position was unchanged.
Tens of thousands of pension savers have united in protest as annual allowance cuts hit public services, reports Laura Miller ‘It is not about tax avoidance but recruiting and retaining vital staff’