Removing the lifetime allowance cap on pensions has big implications for higher education

Last week’s Budget abolished the limit on how much can be built up in a pensions pot without extra tax charges – and the change will affect some university staff. Paul Curran examines the window of opportunity

Paul Curran is Professor Emeritus and former President of City, University of London, and former Chair of UCEA

Wonkhe’s helpful summary of the budget’s implications for higher education omitted one seemingly unimportant but potentially transformational factor.

This is the likely effect of combining the removal of the cap on the amount that can be saved into a pension, the “lifetime allowance”, with the opposition’s commitment to reintroduce this cap after the next election.

The resultant short-term “window of opportunity” offers a stark choice to every senior academic with a relatively high salary and a few decades of pension accrual who thinks the next government is likely to be Labour. The choice is either retire and draw pension before the next election or retire, draw pension after the next election but face an eye-watering 55 per cent (in some cases, six figure) tax charge on pension savings above the cap.

Universities’ annual accounts indicate that up to 4,000 senior academic staff, including world-leading researchers and many vice chancellors, could now be facing this choice.

Likely effects for the sector

There will be some of our senior colleagues who will take the chance that Labour will not win the next election, or whose pension savings are only just above the cap, or who will be willing to pay the additional tax for the benefit of continuing with the career they love.

However, the overall effect is likely to be a rapid turnover of many senior staff in our universities, and this will be hot-on-the-heels of the high rate of post-pandemic turnover.

Such an exodus will result in accelerated promotion opportunities, the departure of some of our most influential world-leading academics and effective professional service colleagues and the academic diminution of some of our great universities, who now have several hundred senior staff at risk. On the other hand, it could lead to a revitalisation of our sector as it struggles to move forward against the current headwinds.

Are government and opposition positions likely to endure?

Introduced in 2006 to tax the wealthy, the lifetime allowance cap decreased since 2012 to include the pensions of many senior professionals with defined benefit pensions in, for example, the police, NHS, civil service, armed forces and universities.

Over the past few days, removal of the cap has received a positive response from pension commentators and the professions, especially the British Medical Association. Despite this, the government may consider reintroducing the cap in the future, albeit at a much higher level, as this would deal with the problem of doctors retiring early, a raison d’etre of the policy, while avoiding the appearance of over-generosity.

Pressure for policy reversal comes from Labour who see the budgets’ removal of the cap as not only a wasteful loss of tax revenue but an inheritance tax-loophole for the wealthy. This is because defined contribution pensions – common in the private sector – can be inherited either tax-reduced or tax-free and so there is now every incentive, for those who can afford it, to maximise the flow of funds into them.

The policy may also come under pressure when, as seems likely, there is not a reduction but a pre-election increase in the retirement rate for senior doctors who take this potentially time-limited opportunity.

Labour could withdraw their commitment to reintroduce the cap if there is public indifference to its removal and they are unable to find a fair and financially viable way of mitigating the detrimental effect of the cap for doctors alone. This challenge has defied the Treasury for the past six years or so since the problem for doctors was identified.

Labour optimists note that doctors can be spared the effect of cap reintroduction if they were switched to the scheme designed for the judiciary. Unfortunately, the judges’ new unregistered and therefore tax-exempt pension scheme would be far too expensive a solution for a forty-fold larger number of doctors. However, there remains time in which to find another solution.

An open window

For the senior academic and their financial advisor, the possibilities outlined above will seem far too speculative. For them, the window of opportunity has opened unexpectedly – the choice is simply to go through it, or not.

Universities will plan for the worst and hope for the best. For the country, the question must be how we prevent the mixing of long-term and complex pensions savings with the disruption of short-term political decision making.

Professor Sir Paul Curran was President of City, University of London, Chair of the Universities & Colleges Employers Association (UCEA) and National Review Body on Doctors’ & Dentists’ Remuneration (DDRB) and is Director & Trustee of the Universities Superannuation Scheme Limited (USSL). He writes here in a personal capacity.

10 responses to “Removing the lifetime allowance cap on pensions has big implications for higher education

  1. I’ve never quite understood (maybe someone can explain?) why the issue for doctors and similar is thought to need resolution by the Treasury rather than just a bit more flexibility from employers and pension schemes. Why not just allow senior staff worried about the cap to opt out of the scheme going forward and (if it is felt necessary for retention) receive some amount of extra salary in lieu of the employer’s contribution? Okay, so they’d have to pay income tax at their marginal rate, but there’s no moral right to avoid that. I wouldn’t expect that dedicated public servants would quit work just to avoid paying the rate of income tax which society deems appropriate for their income level. (I realise this question is tangential to the main focus of the article on people who have already breached the allowance.)

    1. Some NHS Trusts do allow employer contributions to be ‘recycled’ into taxable pay, but it’s a minority at present.
      The NHS Pension scheme relies on the highly paid staff making their employee contributions to subsidize the lower paid, who pay much lower contribution pecentages (well under half), so that the average employee contribution comes in at 9.8%. If the top half walk away, the scheme becomes insolvent.

    1. Clearly doesn’t have an “effective” professional services colleague to do his proof reading as he used to…

  2. For many of the low paid staff, even middle of the scales researchers and technicians, to have such a concern would be nice. Currently I’m looking at a pension of around £8k per annum, after 30 years service middle of the scales, younger staff are looking at even less when/if they ever get to retire. With the current pension disputes expect further backlash!

    1. For anybody on the national pay scale (including senior lecturers, readers and so on) having such concerns would be nice. Even professors on the professorial minimum salary come nowhere near having such concerns.

      As Paul Curran does correctly point out, this only affects “senior academics” (which nowadays seems to mean senior academic administrators, think vice-chancellors, deans et cetera) and possibly some superstar professors (who will also mainly be managers, but managing a very large research group rather than a faculty or a university).

  3. Yes! This article inadvertently reveals what another planet UCEA bosses live on. The changes referred to might affect some senior managers who, contrary to Professor Curran’s protestations, very much are ‘the wealthy’: anyone on a salary of £100K+ is in the top 3% in the UK, and vice-chancellors are well inside the 1% (anyone on £175K+). But they won’t affect senior academics in the meaning that the average student would understand of this term, ie the senior academics who actually teach them. Unless Sir Paul, who according to the USS website has ‘a deep understanding of pay and pensions issues’, has a very different understanding of what he refers to as ‘our sector’ from me? I’m a ‘senior academic’ in the sense of being a Senior Lecturer with 23 years’ experience teaching in HE, dozens of academic publications since getting my PhD over 20 years ago, research well known in my field internationally, regularly asked to peer review research, mentor new colleagues, etc. Just not ‘senior’ in the sense that I’ve never applied for promotion, because I prefer to focus on actual teaching and research rather than ‘leadership’. Also had to go (slightly) part-time a few years ago due to ever-higher workloads being long-term incompatible with chronic illness and caring responsibilities. So how might the changes discussed affect me – and my non-existent ‘financial advisor’? Well, before the Budget raised it, the cap on annual tax-free pension contributions was £40,000 – more than my entire annual salary! Compared to the UK average, and compared to academic colleagues dependent on hourly paid teaching, £38,000 is still (to use Curran’s term) a ‘relatively high salary’ – but I would have to increase my salary several hundreds of per cent before I came close to being benefitted by Jeremy Hunt’s gift to the wealthy. The lifetime allowance being removed from tax relief is the colossal sum of £1,073,100. If UCEA bosses think universities can afford to pay them the kinds of salaries where they are affected by those changes, then why won’t they listen to ‘our senior colleagues’ on pay, even when we’ve been on strike for months? Why are they intent on driving our real wages down even further, with a measly 5% over two years offer, even as they squeeze ever more labour out of us, with no clear commitment to reduce workload – or to resolve the gender, ethnicity and disability pay gaps?

  4. I am surprised to learn 4,000 people on the University payroll are affected by the changes given the £40 k and £1 m thresholds. I will not be shedding a tear if the Labour Party reimpose caps for such wealthy individuals.

    I do feel that those who teach, rather than manage, should be paid more.

  5. It’s a little more complicated than some of these responses would have it. They’re broadly correct if you’ve never worked outside the university sector. But there are (sharp intake of breath) people who have worked outside the sector (in quite junior/middling management roles) and who had final salary pension schemes. Because of the way the value of these are calculated, they push the value of their beneficiaries’ pensions further towards the lifetime value cap than a university DB pension does. So it’s not ALL about VCs and their direct reports.

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