There is perhaps no worse time to embark on reform than when crisis is already underway.
Unfortunately talk of pension reform – an extremely complex and wonky area of public policy in normal circumstances – is having to take place side-by-side the pension crisis within the National Health Service.
Workers across all sectors have seen the amount of money they can put into their pension tax-free reduced, now capped at £40,000. This has created unintended complications in the health sector, as the work often involves unpredictable hours and working overtime, making it more difficult to keep track daily or weekly on how much one has earned.
As a result, high-earning doctors have been rolling back their hours or refusing to work overtime, to avoid crossing the £110,000 earnings threshold, at which point tax charges (i.e. fines) start to kick in.
As a short-term fix, the Government has come up with a one-year pledge to transfer the risk of any inflated pension bill to the NHS, shifting the financial burden from the doctors to the taxpayer.
But this move has become increasingly controversial as it gains awareness; while the staffing shortage crisis within the NHS is widely understood, this fix is undeniably special treatment for one particular profession, singling out doctors while other high earners remain subject to unfairness in the system. Government’s mucky business of picking winners and losers isn’t limited to public contracts or private sector business – it’s happening in the world of pensions too.
The pressure to fix this distortion looks like it may result in a full overview and reform of pensions, which include other biases and loopholes, effecting both low and high paid workers.
But any radical overhaul of the system must be designed to shorten and decomplicate the UK’s famously long tax code; unfortunately, one of the policy ideas gaining the most traction could make things worse.
Calls for a flat rate of tax relief on pension contributions seem to be getting louder, as on the surface this would appear to be a simpler structure. But the complications of paying in at both the basic rate and higher rate would require a significant add-on to the tax code, to deal with a host of potential abuses and special circumstances.
Ideas are being resurrected from Chancellor George Osborne’s playbook as well, which would include moving to a pension ISA, scrapping tax relief entirely and allowing people to withdraw tax free in retirement. Arguably less complex and less vulnerable to abuse, it still comes with some consequences, like being rigged against those on irregular and fluctuating incomes.
The last round of pension reforms dramatically increased complexity in the system, as is being highlighted by the plight of doctors now, and other groups whose means of payment weren’t considered. As pitches for reform are put forward over the coming year, the government must pay careful attention to whether or not they would unleash another round of unintended consequences, or place the UK even further ahead of other tax codes in terms of length and density – an area in which there is no pride in being world leader.