Back in December we reported that the government was planning to consult on proposed amendments to the NHS Pension Scheme in a bid to bolster the NHS workforce. The consultation closed on 30 January 2023 and the government has since confirmed its intention to proceed with 'major' changes to the NHS Pension Scheme. In its consultation response, the Department of Health and Social Care ("DHSC") announced plans to introduce a package of reforms designed to help retain experienced clinicians and remove barriers to returning to work after retirement. The proposals, if adopted, would enable employees to work more flexibly up to and beyond the point of retirement without facing unfavourable tax treatment.
The introduction of retirement flexibilities
In its consultation response, the DHSC revealed that, of the 1,099 responses received through the consultation platform, the vast majority (87%) of respondents agreed that new retirement flexibilities should be introduced as proposed in the consultation document. The proposed changes include:
- From 1 April 2023, employees who have taken their pension from the 1995 section of the NHS Pension Scheme and return to work will be able to join the 2015 Scheme and build up further pension if they wish. This will enable employers to provide a more valuable reward offer to attract and retain their most experienced staff.
- Removal of the 16-hour rule, which limits the number of hours an employee can work per week in their first month after returning to work from retirement. The rule is currently suspended on a temporary basis and will be permanently removed from 1 April 2023.
- From 1 October 2023, members of the 1995 section will be able to draw down all or part of their pension while continuing to contribute to their pension pot.
- DHSC will align the rates of inflation used in annual allowance calculations with the revaluation of scheme benefits and ensure that the annual allowance calculations only measure pension growth that occurs above the rate of inflation. This will lessen the impact of the annual allowance for members of the NHS Pension Scheme and aims to support the retention of senior clinical staff. Note that, as part of the Spring Budget 2023, changes to pension allowances, including the annual allowance, were announced. These are discussed below.
- Widening access to allow primary healthcare workers – such as GPs, general practice nurses and clinical pharmacists – to join the NHS Pension Scheme. These groups have previously had to apply for time-limited access on an ad hoc basis.
Pension Tax Changes
In addition to the changes to the NHS Pension Scheme, employees will also benefit from the broader package of pension taxation reforms announced as part of the Spring Budget 2023, and enshrined in the Spring Finance Bill 2023, including:
- Abolition of the Lifetime Allowance ("LTA") from 6 April 2023. The LTA currently stands at £1,073,100 and represents the maximum amount someone can accrue in a registered pension scheme over their lifetime without incurring a tax charge.
- An increase in the annual allowance ("AA") from £40,000 to £60,000 from 6 April 2023. The AA represents the maximum amount of tax-free pension savings that can be accrued in a year.
- An increase in the minimum tapered annual allowance from £4,000 to £10,000 from 6 April 2023. The adjusted income threshold for the tapered annual allowance will also be increased from £240,000 to £260,000 from 6 April 2023.
- An increase in the money purchase annual allowance from £4,000 to £10,000 from 6 April 2023, allowing those who already access their pension benefits to continue saving an increased amount into their pension should they choose to return to work.
- The maximum pension commencement lump sum for those without protections will be retained at its current level of £268,275 (25% of the current lifetime allowance) and will be frozen thereafter. However, those individuals who already have a protected right to take a higher tax-free lump sum will continue to be able to do so.
The reforms appear to have been positively received by a variety of stakeholders who have previously argued that the current tax regime is forcing senior clinicians to reduce their hours or to retire early.
As well as helping members to achieve an appropriate work life balance and giving them a greater degree of flexibility around how they take their pension benefits, the reform proposals are designed to support patient care by ensuring that highly skilled individuals, such as NHS clinicians, remain in work longer or return to service after previously taking early retirement. This, according to the DHSC, could help tackle care backlogs and provide an important boost to NHS capacity at a crucial time.