Would you work more … for less pay?

Well, YOUR government asks YOUR Doctors to do it!

Doctors Pensions work more earn less

Is this worth reading? Well, a Doctor has told me it’s the best explanation she’s seen.

So, it might be worth a look.

Just saying 🙂

Would you pay – to go to work?

Sounds like a stupid question right?

But imagine you were offered some overtime work at the weekend…

… on a good hourly rate, to reflect your extraordinary training and experience, but then your employer said,

‘Oh, by the way, when you earn that extra £250 … there’s a chance that it’ll trigger a tax bill of £2,500’ 

‘So, you’d better work out if that affects you … before you decide whether you want the work’

Stunned?

Yes, I was too initially, though when I re-checked the rules – not surprised.

Now I think it’s important to see what’s going on here, because it’s actually damaging our NHS and other services.

What’s in this for me?

Well, I’m a writer, educator and consumer champion in areas of personal financial planning – amongst other things.

So, there’s nothing in this for me personally … and if you want to know about more about my educational work, you can check out my about page here 

I’m simply aware – from intense discussions with professionals on social media – that this hideous pensions tax issue is causing serious stress for our Doctors and various others … including the military and other public services.

My son, a young Army Doctor, is a long way off being affected by this himself but has flagged the Twitterstorm raging on this matter.

So, I thought I’d share the essentials of this horrendous situation with you – and offer you my ideas for potential solutions.

If you broadly agree with what I’m saying here (as the Doctors do) then I’d urge you to share this post with friends and family and help us spread the word.

I’m sure we can all agree that we don’t want to damage our NHS and other public services.

OK, so WTF is going on?

Well, that’s a good question and I could quite honestly bore you for hours on the complex issues that bit beneath this problem.

But let me try to sum it up in (something of) a nutshell.

Please bear with me here – I’ll translate this into plain English as best I can – but it’s not always easy with issues of pensions and tax.

Pensions offer tax advantages

I guess most of us know that we’re ‘given’ tax advantages on pension savings, to encourage us to save for old age.

Actually, I disagree with the idea that we’re given tax relief on pension savings because it implies that our income belongs to the government and they generously ‘give’ us allowances in certain areas.

Better to think of your income as your own and just accept that we all need to pay tax in various areas (to fund good public services) but that in some areas (like pension saving) you’re not expected to pay tax.

In any event, most people pay tax on the income they receive from their pension in retirement. So, the idea that you’re ‘given’ tax relief is really rather silly.

Pensions are more of a ‘tax-deferred’ investment vehicle. You don’t pay income tax (up to a point) on the money you put into them – but you do pay it on (most of) the funds you take out at the other end. 

I digress – but hopefully usefully so 🙂

Your (tax-advantaged) pension is limited

So, the government, quite sensibly, like to limit the amount you’re ‘allowed’ to build up in pensions during your lifetime.

And, this limit is ingeniously called the lifetime allowance*

* or ‘LTA’ if you like TLAs …

… sorry, I mean three letter acronyms 😉

Just out of interest, the LTA is currently set at around a million quid and the logic for that is that this sort of fund might, very roughly, generate an inflation-protected income for life of around £40,000 a year. 

Or it would, during more normal times for interest rates … right now you’d be lucky to get an index-linked pension of £25,000 p.a. out of £1M 

And the theoretical £40k p.a. is c. two-thirds of a salary of £60,000. 

Bottom line is … the LTA is set at a level so as not to benefit multi-millionaires. 

So, no one is arguing about the level of this LTA – at the moment anyway – and having a limit on the total pension pot is just common sense.

You wouldn’t want a multi-millionaire holding tens or hundreds of millions in funds that build up tax-free, now would you?

But then there’s this second limit!

However, there’s another lid (or ‘allowance’) called the annual allowance (known as the AA in pensions parlance and not to be confused with two other organisations of the same name) …

… which limits the amount of pension that can be paid into a pension each tax year.

So, to finish off our tour of acronyms, for now, the name given to the value of what’s put into your pension each year is the ‘pension input amount’ (or PIA)

Are you with me so far?

Good.

So, the first point to note in this story is that we don’t really need this limit on what goes in (the AA) each year because there’s a limit on the total amount that can be built up in pensions (the LTA) 😉

However, the government like to have this annual allowance lid to stop rich business owners from suddenly pumping massive amounts (hundreds of thousands of pounds) into their pension funds to avoid large tax bills when they make a profit … and that used to happen quite a lot back in the old days.

When the government last overhauled the pensions regulations (in April 2006) they introduced this annual allowance limit and set it at £215,000 just to ward off the rich tax gamesters.

What’s more, they raised this AA each year, broadly in line with inflation (just as most allowances are raised) so that by the 2010-11 tax year it had reached £255,000.

All very sensible so far, you might think.

And you’d be right.

But then over time, governments decided to make a tax grab on middle Britons (a group I’m particularly keen to protect from dodgy dealings by anyone) by slashing this allowance from £255,000 to just £50,000 for the 2011/12 tax year.

Then, 3 years later, they cut it again to £40,000 and then … on 6 April 2016 introduced a further ‘tapered’ reduction (the details of which I’ll not cover here because you wouldn’t thank me if I did!) which in the worst case, reduced this ‘allowance’ down to £10,000.

(and for the pensions experts out there … yes, the government also applied an extra tax on higher earners with a ‘special annual allowance’ tax charge in tax years 2009/10 and 2010/11) 

Which all means this allowance has been cut by 96%

Now, I understand that I’ve thrown a lot of numbers at you and pensions really are horribly tricky beasts.

So, let me summarise.

This largely unnecessary cap (the Annual Allowance on pension inputs) has been cut for some people by c. 96% over the past 10 years.

And what’s even more shocking is that it was cut under Conservative or Conservative-led coalition governments.

Wow!

Yes, wow … imagine if your personal tax-free allowance had been cut by similar amounts?

It’s unthinkable, isn’t it?

Yes, it is.

But they did it anyway in an attempt to trap hard-working professionals (who, I’d hope we’d all agree have earned the right to a reasonable income) with hideous tax charges in various circumstances.

If you’re really interested in the detailed tax rules around pensions, we can explore ‘some’ of those another time but … I warn you, it’s a deadly dull (and irrational) subject and misses this main point.

Wood for the trees

The impossible position of our Doctors

I have no doubt that, under pressure after the financial crisis, the people in government clearly did not think through all the consequences of this tax grab. They just went for it.

And the result is an almighty cost and mess inside our pension schemes.

We have thousands of pensions ‘experts’ and administrators who have wasted (and continue to waste) their time designing systems and communications materials around these silly tax rules.

But what worries me most of all is the fact that many of the UK’s most brilliant hospital consultants are:

  • Wasting their time (and getting stressed – which is not good for their work) about these massive tax bills.

Some are even remortgaging their homes to pay these bills in order to avoid the punitive interest rates on tax loans from their pension schemes

Yes, this system is now so mad that we now have expensive loan facilities built into pension schemes in order to help people pay massive tax bills!

  • And the Doctors are also being forced to waste their time to learn these complex pension tax rules, in order to work out how best to sidestep the most hideous tax charges.

And that’s because very few ordinary advisers and accountants understand the details either!

Now, these Doctors would really rather be working hard and taking on those offers of overtime work, where they can.

BUT, as I’m sure you can understand, they would prefer not to be exposed to more tax (sometimes a lot more) tax than they earn on a pay increase and or overtime earnings. 🙁

Any reasonable person can see that this is simply not fair.

The Doctors are effectively being forced to:

  1. Turn down requests to do overtime work.
  2. Opt out of their pension scheme for a period – and lose valuable pension (and other) benefits (which in turn can force them to take out additional insurances) or
  3. Reduce their normal working hours … and below a certain limit, that’s only possible by moving to a part-time contract.

Sadly, for those Doctors committed to certain careers and overtime work (in emergency and rescue services for example), there is no escape from these punitive taxes.

They simply have to keep working long hours, knowing that the extra work could reduce their income.

Now, how crazy is that?

So, what’s to be done

Well, that’s another good question

According to one rather confused pension ‘expert’ that I’ve had the misfortune to encounter in the recent Twitter debate storm on this … we should all simply ignore this problem!

We should simply tell our Doctors to get on with their work or … arrange their working patterns around these stupid tax rules.

Oh yes, quite unbelievably this is what has been suggested by one (self-acclaimed) pensions expert online just this week.

I’m of a different mind and believe the solution is quite obvious.

The government needs to reverse off the emergency changes it made to make a tax grab on these people.

What does that mean?

Well, if you want that in pensions technical terms it’s this:

Scrap this ‘taper’ of the AA and lift the level of the AA to where it no longer imposes hideous and unnecessary tax bills on our professional people.

Sure, the tax rule makers can keep an Annual Allowance at a level that prevents the super-rich from abusing the tax system. This is, after all, what the AA was designed for.

But there’s simply no case for abusing the professional classes in this way.

And this change is perfectly possible

It just requires the government to admit that it made a mistake in the past and get on and fix it.

They can blame the previous Chancellors, or explain that ‘things have changed’ now. It’s quite standard political procedure.

But let’s be very clear.

If these changes are not made, we will continue to have highly capable doctors quite rightly turning down work – to avoid 100%+ taxes.

What’s more, we will continue to have NHS trusts outsourcing the work that they cannot now get done by our NHS doctors to private suppliers who will charge a lot more for the same work!

And I think we can all agree that this does NOT make sense, right?

So, what can you do?

Well, if you genuinely care about the NHS (which I assume the vast majority of people in this country do) … and would prefer not to abuse the people at the heart of it (the doctors) with tax in this way.

Then, please … write to your MP and tell them so.

And if you’re not sure what to write – just send them a link to this article.

OK, but is this just about Doctors?

Oh, no. I’ve just used Doctors as an example here because they have a particular pay structure that can create obscene (100%+) tax bills in certain situations.

Actually, this is a tax grab on all middle Britons who enjoy good career progression in jobs which have defined benefit pensions.

So, that’s a vast number of people in the military and many other public service jobs.

Funnily enough, even people working @hmtreasury can get caught by these penal tax charges too … and I understand that *they* are really not happy about them either.

So… please write to your MP

Ask them to reverse off these stupid tax grab changes to pensions.

And let’s have all these good, highly professional people concentrating on their work rather than the details of a twisted pension tax system.

I mean, seriously, what would you say, if your employer said they’d pay you £250 for some overtime on Saturday … but that your pay for that day might result in an additional tax bill of £2,500 this year?

Now I hope you’ll forgive my French (and despite my name it’s not very good) but I guess you might tell your boss to stuff their overtime into a place where the sun doesn’t shine.

But that’s not an option for all our Doctors and other professionals affected by this. … and whilst I joke about this – to grab your attention – this really is a very serious issue.

And if it now worries you … imagine how it might affect the Doctors in the hospitals, emergency helicopters and elsewhere?

So, please share this Insight in the normal way with one of the buttons around this page.

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All the best for now

Paul 

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