Analysis | One Way Out of the Cost-of-Living Crisis? Retire Early

Those numbers will come as no surprise to anyone who has recently tried to book a doctor’s appointment. Yet the staffing crisis will keep getting worse — unless the government fixes its pension legislation.

There is a myriad of personal and professional reasons why staff are heading for the exit in droves, but an important one is financial.

For many people, a pension is simply a pot of money that they must nurture to ensure their savings don’t expire before they do. Economic conditions such as falling markets and rising inflation encourage these folks to delay their retirement plans.

However, many in the public sector, and a lucky few outside, have so-called final salary pensions, which provide an income for life linked to inflation. The conundrum is that while they are working, this pension entitlement builds in line with their salaries, which are rising slowly in the public sector, if at all. Once retired, on the other hand, their pensions rise in line with inflation. With CPI at 9%, many nearing retirement might be better off leaving now than carrying on working.

Yet the fact that inflation (and therefore their pension) is rising so much quicker than their salary is not the only reason why an older doctor might be better off retiring now.

Pensions are also tax-efficient because the government offers tax relief to incentivize workers to make provisions for their retirement. For every 100-pound ($125) contribution, a basic-rate taxpayer receives 20 pounds of relief. So the net cost of increasing your pension by 100 pounds is just 80 pounds. For higher and additional-rate taxpayers, the relief is even more generous at 40 pounds and 45 pounds, respectively.

The government estimates that the annual cost of this tax relief is more than 41 billion pounds. Since most of this accrues to higher earners, it has taken a series of measures over the years to cap the amount of relief people can claim.

But the way these caps operate is so complex that even many professionals are unable to understand them. When they do struggle through the calculations, they tend to find that their retirement benefits build far more slowly. This further disincentivizes those close to retirement from continuing to work.

There is both an annual limit on pension contributions of 40,000 pounds and a lifetime limit, which is currently frozen at the rather unwieldy figure of £1,073,100.

If you exceed the lifetime allowance (LTA), any excess is taxed at either 55% if you draw it as a lump sum, or 25% if you take it as income (but you will also pay income tax in addition to the charge). To make matters worse, if you earn over a particular threshold (the calculation of which is again needlessly complex), your annual contribution allowance is progressively reduced to as low as 4,000 pounds a year. To be fair, the government has recently increased this threshold to try to retain its most experienced workers.

The government claims that doctors still benefit from continuing to work and making additional contributions, notwithstanding the LTA and AA charges.

In the narrowest of senses, that is true. It is certainly the case for those in the private sector with more standard pension arrangements. For most people, attempting to avoid pension charges by retiring is akin to reducing your income tax by not working.

However, thanks to the ferocious complexity of NHS pensions, there is another factor that makes the cost-of-living crisis decisive for those considering retirement: The main NHS scheme has no late-retirement factor. What that means is there is no increase in pension benefits for delaying your retirement beyond your contracted date.

Many final salary pensions include a sweetener for those working beyond their contracted date to compensate them for the pension they have foregone by continuing to work. Indeed, even the UK state pension rises in value by 1% for every 5 weeks that someone delays claiming it. But in this NHS scheme, any foregone pension is lost forever. And this, of course, also includes any uplift due to inflation.

Faced with such calculus, doctors nearing retirement are voting with their feet.

As far as the government is concerned, the prescription is simple. If they want more experienced doctors to stay, they need to improve the financial incentives and do so in a manner that all can easily understand.

The takeaways are twofold: Having annual and lifetime pension contribution allowances is causing confusion and resentment. Do one or the other, but not both. When the tax code is so complicated, people start spending more time thinking how to legally avoid tax than trying to actually earn money to be taxed on. This is no longer some neo-liberal argument for tax cuts for the rich, it is literally true for senior doctors and civil servants.

The second is simple finance. If you want people to work when they are inclined not to, you must improve pay or conditions, or ideally both.

If you let NHS workers take the full hit of the cost-of-living crisis when they have an inflation-protected pension as an alternative, you don’t have to be a brain surgeon to work out how that one is going to end.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stuart Trow is co-host of “Money, Money, Money” on Switch Radio and author of “The Bluffer’s Guide to Economics.” Previously, he was a strategist at the European Bank for Reconstruction and Development.

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