Blog: growth in NHS agency workers and reduction in Lifetime Allowance

By John Deacon The Lifetime Allowance (LTA) is scheduled to reduce to £1m in April 2016. This was a Labour party aim too, so I suspect we will not see this change if there is a new government.
Health services

The unintended consequences of a reduction in the LTA are that senior employees throughout UK plc will give serious thought to their continued membership of company pension schemes. They may well not wish to face a 55 per cent tax charge on accumulated retirement benefits greater than £1m. It is unlikely that this same group will simply accept the loss of further pension accrual without compensation from their employer in the form of extra salary, especially when there may well exist a route by which they can significantly increase their earnings, and with this increase go about funding through various savings vehicles, such as individual savings accounts (ISAs), the gap in their retirement income needs.

Andy Burnham, the shadow secretary of state for health, was recently on the Today programme discussing the state of affairs with the financing of the NHS, specifically the subject of agency workers. Apparently, the growth of recruitment from this source is considerable and is detrimental to NHS finances. His stated objective is to try and reduce the dependency on agency workers and thus help to reduce costs for the NHS. With the reduction in the LTA effective from April 2016, is this not a forlorn hope?

I would not be surprised, with the LTA falling to £1m, to see large numbers of employed staff aged 55 or over leaving/retiring from the NHS when they realise they can avoid and/or reduce their exposure to the 55 per cent tax charge by doing so. It is likely that at £1.25m for the remainder of the 2015–16 tax year, a number will seek to retire pre-April 2016, with this trend merely continuing into the years ahead.

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However, let us suppose that the NHS can’t afford to lose these highly skilled, experienced and long-serving employees (which might seem a statement of the obvious) and, in turn, these same doctors, consultants and nurses don’t in fact want to give up their employment and reach for their slippers at age 55. What’s to be done? Market economics suggest it is unlikely that this group will simply resign their pension scheme membership and thus accept a lower benefit package; rather they will leave and seek re-employment via agencies where pension membership is not a material element of the package, but where this same package is significantly greater than that which was paid as an NHS employee. Andy Burnham’s attempts to reduce the cost and dependency on agencies will, I suggest, be hampered by the lower LTA resulting in the most experienced and valued NHS employees leaving direct employment and realising a higher pay packet, at tax payers’ expense, via agencies.

As the government seeks to increase its tax take (yet another raid on the pensions piggy bank) by targeting employees with pension funds valued at more than £1m, a level that will affect a growing number of middle-income earners, as tax payers, we will in fact end up funding increased costs of employment within the NHS. Indeed, this same scenario can be played out in any number of public sector organisations. Is this good value for the tax payer?