Mortgaging our pensions to pay our contributions

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The NHS “scheme pays” facility allows members, faced with a tax liability arising from breaching the annual allowance, to meet the payment from future pension benefits. This amounts to taking our a mortgage on the pension.

For many senior members of the schemes, especially consultants and senior GPs this is becoming an annual event with the charges on future pension severely damaging retirement prospects.

The problems start when a significant pensionable pay rise triggers the scheme to notify HMRC of a chargeable event. Normally the deemed benefit from the consequent increase in pension rights would not exceed the annual allowance (£40,000) but especially where the benefit relates to final salary rather than a career average formula, a substantial pay rise late in a career can often be valued at more than £100,000. Any benefit falling due over the annual allowance is taxable at the member’s marginal rate (typically 40 or 45%).

There is a great deal that can be done to ease the pain using carry forward and a careful analysis of pension input periods, most doctors who are hit with unwanted and unexpected tax-bills will make use of tax advisers and financial planners. However there is a systemic issue for those regularly earning over £150,000 and that’s that the Annual allowance tapers from £40k to £10k the more that is earned. Any doctor regularly earning more than £210,000 can expect (with an AA of £10k) to be paying an AA bill every year. Those on the taper report the combined impact of paying 45% on income and a further 45% on pensions makes the financial value of any extra work -very limited.

Could parents desperate to get children on the housing ladder mortgage their pension rather than reportage their house?

At a time when the NHS is stretched and waiting lists getting longer, pensions are being cited as making matters worse. In this complicated world, doctors are evolving their own pension language – this includes the “hokey”, the term they use for opting out of the scheme for a year for tax purposes. The concept of opt-outs and partial opt-outs is becoming increasingly relevant to doctors trying to best manage their tax-affairs.

It is against this increasingly febrile tax environment that the opportunity to defer the payment of tax into retirement is becoming popular. Nobody likes to pay a tax bill but to pay it be means of a small clip on a lifetime of personable earnings is a lot more comfortable to the medical profession than paying upfront.

Scheme pays is so painless that it has been advocated as a means of paying other pensions bills, including the cost of advice. Certain notable commentators, including Sir Steve Webb, have suggested that scheme pays might be an alternative way of paying the advisory charge for a pension transfer analysis. Heads you transfer, tails you take a small clip on you pension.

Critics of extending scheme pays argue that this is the start of a slippery slope, that could lead to a defined benefit scheme turning into a flexible benefits plan. Could schemes pays be used to pay for ongoing financial education courses or even become a source of more general finance. Could parents desperate to get children on the housing ladder mortgage their pension rather than reportage their house?

The concept of a pension as a means of financing is of course nothing new. Small self administered schemes and executive pension were regularly tapped for self-investment and loan-backs, but these needed to be commercial arrangements. There has never been a legal means of pension-busting and HMRC’s attitude to unauthorised payments is draconian (as those caught in pension scams will know).

Scheme pays is the first legitimate means of buy-now ; pay-later and ironically it is sanctioned by HMRC as a means of maximising tax-revenues.

So far, the prospect of using scheme pays to finance advice is at no more than discussion stage. A more likely direction of travel for scheme pays is as a more general tax-collection facility for HMRC.

Were HMRC ever to implement a shift to a single rate of pension tax-relief or (in a more extreme example scrap tax-relief and move from an EET to a TEE tax framework, scheme pays could be the means to do it.

Transitioning those used to paying contributions net of tax-relief to paying the full gross contribution might be considered too much of a financial strain. Creating a debt against a future capital sum or a future pension , based on unpaid tax could prove more palatable.

Rumours that HMRC has been exploring this idea regularly arise though no Government consultation has ever tested this idea. It might yet be the follow up to Pension Freedoms for a chancellor looking to pull a rabbit out of the hat!

In conclusion, scheme pays is an extremely bright idea – which if used responsibly, can be very helpful to someone with an unexpected persons tax bill. But as with Pension Freedoms, it has the capacity to eat the pension it serves

It is both a tool and a weapon with all the beneficial and detrimental connotations those words produce.

 

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11 years providing financial advice to individuals directly and through employers. 14 years within insurers working with advisers to provide better DC and DB outcomes. 25 years left to make a difference!

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