Defined benefit and defined contribution schemes Defined benefit Secure income for life, which increases each year. Retirement income is based on how many years a member has worked for their employer and the salary they have earned. The NHS Pension Scheme is a defined benefit scheme and benefits are guaranteed by the government. Defined contribution Retirement income depends on factors including the amount a member and employer pays in, investment performance and the choices a member makes at retirement.
The schemes 1995/2008 Scheme The 1995/2008 Scheme is a final salary scheme, split into two sections: 1995 Section – benefits in retirement based on best of last three years’ pensionable pay 2008 Section – benefits in retirement based on average of best three consecutive years in the last 10. 2015 Scheme The 2015 Scheme is a career average revalued earnings (CARE) scheme. Benefits in retirement based on the average of a member’s pensionable earnings throughout their career.
A valuable part of overall reward offer. Helps to recruit, retain and encourage staff to return to the service. Provides a wage in retirement (defined benefit scheme). Access to a range of insurance benefits. Retirement benefits underwritten by government. No defined contribution scheme would provide the same level of benefits. • The benefits of the NHS Pension Scheme
£525 billion • £525 billion is the value of the pension liabilities of the Scheme as at 31 March 2018. • As the NHS Pension Scheme is an unfunded scheme, these liabilities are underwritten by the Exchequer. • Figures from the NHS Pension Scheme Accounts and valuation reports.
The maximum amount of pension growth permitted each year free of tax – not contributions. Includes all pension benefits. Tax relief claw back on benefits earned over the allowance. • Annual allowance overview Value of benefits earned over the year ‘Pension Input amount’ Excess Annual allowance
Annual allowance limits are set by HMRC. Reduced over recent years. A wider range of NHS staff are affected, not just high earners. • Annual allowance limits
Options for affected staff Carry forward • Employees can use any leftover annual allowance from the previous three tax years. • Employees may ask the scheme to pay the tax charge to HMRC, in return for lower benefits in retirement. • Now available to all staff submitting a notification by the deadline. • The employee may pay the tax charge directly to HMRC from existing funds or savings. • Scheme pays • Pay the tax charge
Annual allowance – the complexities • OUTCOME ONLY KNOWN AFTER THE TAX YEAR HAS ENDED • Annual allowance tapering depends on all taxable income • Pensionable pay + non-pensionable pay + other taxable income • Scheme only notifies members who breach the £40k annual allowance INDIVIDUAL AND ADVISER TO: CALCULATE CARRY FORWARD COMBINE TAXABLE INCOME ASSESS ANY TAX CHARGE CHOOSE HOW TO SETTLE
The research • NHS Employers commissioned First Actuarial to research the impact of pension taxation, this included: • How widespread pensions tax charges are in the NHS. • The size of pensions tax charges faced by affected employees. • Any impact of these charges on the working behaviour of employees – and how this impacts the objectives of the NHS and on the NHS Pension Scheme.
Research findings - summary Financial advice • Results showed that 2 out of 3 respondents intend to take or have taken financial advice on their pensions tax position. • Those that have breached annual allowance in the past are much more likely to have reduced their hours as well as avoided any additional work or promotions. • Half of those who have not breached in the past have taken some kind of action. • Employers specified impacts such as time taken to deal with queries and manage requests from members such as opting in and out of the Scheme. • Actions taken • Employer impact
National action • DHSC consultation on new proposals to change the NHS Pension Scheme to address the impact of pension taxation on NHS staff, organisations and service delivery. • The new proposals are designed to: • make the scheme more flexible • enable members of the scheme to control the value of their pension growth.
National action • DHSC is seeking views on: • introducing a new flexible accrual option, which would allow senior clinicians to choose to build up a lower level of pension benefits and pay correspondingly lower employee contributions (the options available would range from almost zero to 100 per cent, in 10 per cent increments) • allowing scheme members to phase their pensionable pay increases over a set period to avoid spikes in pay which can create annual allowance issues • who pension scheme flexibilities should be available to • improving scheme pays • support and guidance for individuals • the equality impact assessment of the proposals.
Have your say • We are keen to hear your views and collate evidence to support our response to the consultation. • Please share your comments and evidence with NHS Employers before Friday 4 October 2019 by emailing firstname.lastname@example.org or completing our online survey. • The deadline for submitting consultation responses to DHSC is Friday 1 November 2019.
The importance of independent financial advice • General lack of understanding and knowledge about pensions tax. • Pension tax position depends = taxable income from all sources. • Employers can signpost staff to information and resources and provide general advice. • Individuals who are unlikely to be affected by the tapered annual allowance may turn down additional work unnecessarily. • Employers should be mindful that they are not able to provide regulated financial advice on an individual’s tax position as they do not know their overall financial or pension tax position.
local optional measures • There are a number of local options that NHS organisations are able to explore, including: • Existing flexibilities to enable employees to remain in the NHSPS • Managing pensionable pay. • Local Clinical Excellence Awards. • Designing innovative TOIL arrangements. • Use of multiple contacts of employment. • Establishing new organisations for service delivery. • Possible arrangements for employees who decide to opt out: • Opting out of the Scheme for a proportion of the scheme year. • Paying the employer contributions as additional salary.
NHS Employers has a range of resources to support employers, including: Pension tax guidance for employers. Pension tax briefings on annual and lifetime allowances. Employer briefing on responding to pension tax and pay queries. Guide to options for affected staff. Infographic on key annual allowance dates and actions. www.nhsemployers.org/pensionresources • Resources
Actions for boards • Identify and engage with staff who may be affected or think they may be affected by pensions tax. • Communicate the range of resources and guidance available to staff. • Encourage staff who think they may be affected to seek independent financial advice about their specific financial position. • Consider the decisions made by staff who think they may be affected and the impact this is having on staff, the organisation and service delivery. • Explore the range of optional local measures you could take and decide which are appropriate for individuals or staff groups. • Work in partnership with trade union colleagues to reach agreed solutions. • Review any agreements regularly to ensure the arrangements remain appropriate for the individual or staff group and you as the employer, and to ensure any national solutions developed at a later stage can be taken into consideration.