The appointment of Sajid Javid as Chancellor provides new hope for fixing the pension allowance crisis argues Gary Smith, Chartered Financial Planner at Tilney
Gary Smith commented:
“On the campaign trail, Boris Johnson vowed to “fix” the pensions tax issues which are having a serious and perverse impact on the NHS, with consultants reducing their workload to avoid punitive tax charges and a sharp rise in early retirement rates for GPs.
“However, he wrongly diagnosed the problem as the lifetime allowance – reform of which would certainly be welcome – when the more pressing problem is the tapered annual allowance for higher earners. The tapered allowance, a parting gift from former Chancellor George Osborne, was only introduced in 2016.
“It has turned out to be poison pill and a disaster from the inception: overly complicated for individuals to calculate, especially where their earnings and savings income are variable, and it is also highly punitive, deterring people from making adequate provision for their retirement.
“While Philip Hammond has doggedly refused to countenance scrapping this toxic allowance, the radical change of guard in the Cabinet this week provides the opportunity for new thinking and a fresh approach. Proposals to tweak the NHS Pension scheme and improve its flexibility, amount to rearranging the deck chairs on the Titanic.
“Mere tinkering such as this won’t resolve a problem that requires urgent action to stop surging NHS waiting lists and a shortage of GPs. If not urgently addressed, such problems could take years to fix and at vast cost. Overhauling a tax allowance can be achieved much more swiftly than finding a new generation of doctors.
“Sajid Javid will need to act decisively and scrap the tapered annual allowance in his first Budget to bring a swift resolution to the NHS pensions crisis and also create a fairer, simpler set of pension rules for all professionals grappling with the tapered allowance. While such a measure would undoubtedly leave him open to the criticism that such a measure benefits only the highest earners, the negative and costly impact on vital public services should take precedence.
“Importantly, Mr Javid has himself advocated scrapping the 45% tax rate for those earning over £150,000 arguing that ‘tax policy shouldn’t be about virtue signalling. If cutting tax rates means the rich will pay even more in tax, paying for more nurses, teachers and police, what’s wrong with that?’. This suggests his instincts will be driven by the bigger picture and the overall effect of pensions and tax policies, even if that leaves him open to criticism around how his policies might be perceived.”