A way out of the cost of living crisis? Take early retirement

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The British government is desperate to retain its most experienced doctors, nurses and civil servants. Vacancies in NHS England staff rose by more than 21,000 from a year ago, topping 110,000 for the first time. Yet the number of doctors opting for early retirement has more than tripled since 2008. There are now 1,343 fewer family doctors to cope with 3 million additional patients enrolled since June 2017.

These numbers will not surprise anyone who has recently tried to book a doctor’s appointment. Yet the staffing crisis will only get worse unless the government corrects its pension legislation.

There are a myriad of personal and professional reasons why staff are heading out in droves, but one of the biggest is financial.

For many people, a pension is just a sum of money they need to maintain to make sure their savings don’t expire before they do. Economic conditions such as falling markets and rising inflation encourage these people to delay their retirement plans.

However, many in the public sector, and a lucky few outside, have so-called final salary pensions, which provide lifetime income linked to inflation. The conundrum is that while they’re working, that pension entitlement accrues based on their wages, which rise slowly in the public sector, if at all. Once retired, however, their pensions increase in line with inflation. With a CPI at 9%, many people close to retirement might be better off leaving now than continuing to work.

Yet the fact that inflation (and therefore their pension) is rising much faster than their salary isn’t the only reason an older doctor better retire now.

Pensions are also tax-efficient, as the government offers tax breaks to encourage workers to build up provisions for their retirement. For every 100 pounds ($125) contributed, a basic rate taxpayer receives 20 pounds of relief. So the net cost of raising your pension by 100 pounds is only 80 pounds. For higher and supplementary 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 over £41 billion. Since most of that goes to high earners, it has taken a series of steps over the years to cap the amount of aid people can claim.

But how these caps work is so complex that even many professionals are unable to understand them. When they struggle with the math, they tend to find that their retirement benefits accrue much more slowly. This further discourages people close to retirement from continuing to work.

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

If you go over the Lifetime Allowance (LTA), any excess is taxed either at 55% if you take it as a lump sum, or 25% if you take it as income (but you will also pay tax on the income in addition to the load). To make matters worse, if you earn above a particular threshold (the calculation of which is again unnecessarily complex), your annual contribution allowance is gradually reduced by up to £4,000 a year. To be fair, the government recently increased this threshold in an attempt to retain its most experienced workers.

The government says doctors still benefit from continuing to work and paying additional contributions, LTA and AA charges notwithstanding.

In the narrowest sense, this is true. This is certainly the case for those in the private sector who have more traditional pension plans. For most people, trying to avoid pension costs by retiring is like reducing income tax by not working.

However, thanks to the fierce 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 . This means that there is no increase in pension benefits to delay your retirement beyond the contractual date.

Many end-of-career salary pensions include a sweetener for those who work beyond their contract date to compensate them for the pension they gave up by continuing to work. Indeed, even the UK state pension increases by 1% for every 5 weeks someone delays claiming it. But under this NHS scheme, any abandoned pension is lost forever. And that, of course, also includes any increase due to inflation.

Faced with such a calculation, doctors close to retirement vote with their feet.

For the government, the prescription is simple. If they want more experienced doctors to stay, they need to improve the financial incentives and do it in a way that everyone can easily understand.

The takeaways are two-fold: having annual and lifetime allocations of pension contributions is confusing and resentful. Do one or the other, but not both. When the tax code is so complicated, people start to spend more time thinking about how to legally avoid tax than trying to make money to be taxed. This is no longer a neoliberal argument for tax cuts for the rich, it’s literally true for senior doctors and civil servants.

The second is simple finance. If you want people to work when they’re inclined not to, you need to improve wages or conditions, or ideally both.

If you let NHS workers bear the brunt 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 figure out how that – this is going to end.

More from Bloomberg Opinion:

• ECB removes strategic ambiguity on rate hikes: Marcus Ashworth

• Central bankers don’t know how to fight inflation: Mark Gilbert

• The Queen has had far more triumphs than failures: Martin Ivens

This column does not necessarily reflect the opinion of the Editorial Board or of 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.

More stories like this are available at bloomberg.com/opinion


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