Doctors’ pensions should be raided more, not less

Striking junior doctors on a protest in London, in August 2023
Striking junior doctors on a protest in London, in August 2023

The Chair of the BMA Pensions Committee, Dr Vishal Sharma, wrote to the Chancellor this week setting out doctors’ demands for pensions in the Budget. The letter was quite detailed, but it essentially said: “leave our pensions alone or there will be trouble”.

Dr Sharma mentioned four areas where he demanded “no change”: no new lifetime allowance; no introduction of flat rate tax relief on pension contributions; no abolition or reduction of the tax-free lump-sum; no NI on employer pension contributions (or exempt the NHS from the new rules).

He also asked for indexation of the annual pension contribution allowance, as this is now hitting higher-paid workers hard.

Dr Sharma does make some good points. Pensions are long-term investments. Workers build their financial plans on their pensions and pensions promises. Governments of both parties have long since stopped thinking sensibly about occupational pensions; instead they have seen the large pots of money that they represent as cash-cows to be milked. On the basis of reports so far, this new Chancellor seems to view pensions in much the same way.

Let’s take each of Dr Sharma’s points in turn. The Lifetime Allowance was finally abolished in April 2024, and this new Government has indicated that it will not re-introduce it. Many commentators believe that it was largely NHS doctors’ past interventions that nudged the previous government to abolish this tax, and their renewed threat in this letter is likely to continue to keep this Labour Chancellor from venturing into this area.

There is speculation that the Budget might introduce flat-rate tax relief to pension contributions – say at 30 per cent – to all qualifying pension contributions. This would benefit lower-rate taxpayers, and penalise higher, and additional-rate, taxpayers. It would likely yield substantial sums for HM Treasury, so is seen as a real possibility. NHS doctors clearly want to head this off, as it would hit their higher-paid colleagues very hard indeed.

At the moment, retiring pensioners can take 25 per cent of their pension “pot” as a tax-free lump sum (now capped at £268,000 = 25 per cent of the old lifetime allowance). NHS doctors’ pension pots are calculated by HMRC as 20 times their annual pension plus the tax-free lump sum.

So for a doctor earning, say, £100,000 per annum, this might mean an annual pension of, say, £60,000 per annum, so a “pot” at retirement of about £1.4 million. Many, many doctors will be at or near the £268k limit for their tax-free lump sums, and will have planned their finances around this. Losing this would be a serious financial hit for them.

On the proposal for no NI on employer pension contributions: introducing this would create huge problems for NHS Trusts and GP employers, since employer contributions are currently 23.7 per cent of pay. The NHS will pay about £16.7bn in employer pension contributions in 2024-25, so adding NI would cost the NHS some £2.3 billion. Outrageously, Dr Sharma did suggest in his letter that the Government might exempt the NHS Pension scheme from this charge if introduced generally.

Finally, there are esoteric rules which limit high-earners’ (over £200,000 per annum) ability to get tax-relief on pension contributions. The BMA is demanding that these thresholds are raised with inflation to keep down the number of doctors hit by these limits. Non-indexation of thresholds is a favourite of Chancellors, so the BMA may be disappointed in this demand.

All the demands made by the BMA are essentially to continue the status quo. However, NHS doctors are not ordinary pensioners. Most UK workers are now only able to build up decent pensions by investing money at their own risk, without any guarantees, in what are euphemistically called “Defined Contribution” (DC) pensions. NHS doctors, along with all other public sector employees, are now the only workers in the UK who get a different sort of pension – “Defined Benefit” – a pension which is also dramatically better than DC pensions.

Unlike ordinary pension saving these do come with guarantees – they are based solely on earnings and length of service. It is not surprising that doctors are threatening (or implying) industrial action or mass early retirement if they lose this fabulously valuable benefit from working in the public sector. But nor is it something the Government should necessarily capitulate to.