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.