As the details of the McCloud Remedy continue to unfold, we analyse the effects the government reforms have on your NHS pension scheme. If you need a recap of the history please go to the summary at the end of this article. Otherwise please read on…
How will the McCloud Remedy affect YOU?
1. Annual allowance calculations: Are you due a tax rebate or a scheme pays reduction?
Many members will be painfully aware that the 2015 pension scheme is more generous than the 1995 or 2008 schemes and will have faced substantial tax charges as a result of breaching their annual allowance in recent years.
Moving service back to the legacy scheme could mean that any annual allowance charge that has been levied could be reduced or even eradicated. The reason behind this is the accrual rate in the ’95 or 2008 scheme is not as generous as the 2015 scheme. Before you start to google ‘accrual rate’ – simply put, it is the rate at which you amass pension benefits. This is expressed as a fraction, the lower the fraction, the more generous the scheme. The 1995 scheme accrual rate is 1/80th, and the 2015 scheme is 1/54th. If the old schemes are less generous then you do not amass as much pension benefit. The amount you are deemed to have contributed is less, so in a majority of cases, we expect to see lower annual allowance figures.
It will be wise to revisit your annual allowance position, particularly if you have paid a liability, be that through scheme pays or via your tax return. However, remember if you are due to pay a charge please do continue to do so. If your revised figures mean the charge disappears or reduces you will need to contact your accountant to resolve any rebate due. If you have utilised scheme pays then you will need to contact the pensions agency.
To check your figures, we recommend requesting your latest annual allowance figures for the previous tax year from the NHS pension scheme in July of each year to obtain your most recent year’s accrual and deemed value. Set an annual reminder on your phone!
The annual allowance figures that will reflect the changes are expected in October of 2023.
2. The lifetime allowance – more good news
By way of a recap, the Lifetime Allowance (LTA) is the total value of benefits you can build up from all registered pension schemes without incurring a tax charge. All pension benefits you build up use a percentage of your lifetime allowance. This includes pensions outside the NHS pension scheme (apart from the state pension).
What is the impact of the McCloud case on your lifetime allowance? If you elect to retain service in your legacy scheme, re-joining the 2015 scheme in April 2022, then you could see your pension having a lower value against the lifetime allowance.
It is using the same reasoning as the annual allowance, in that the old schemes are less generous, therefore you accrue less pension and consequently a lower pension means you have a lower value against the lifetime allowance.
I speak to many who have concerns about the lifetime allowance and they will be thinking it’s good news if the chance of a breach is lowered. I expect they will be reading and maybe asking if the old schemes are less generous then do I really want to move schemes – this leads me nicely onto the next point…
3. Do I have a choice about what scheme I’m in now?
The simple answer is no – you don’t. However, when it’s time for you to claim your pension benefits, you will be asked if you want to receive legacy scheme or reformed scheme pension benefits for your service between 01 April 2015 and 31 March 2022. This process is called the ‘Underpin’.
NHS pensions will provide you with information at the time to help you make your decision. Asking you to make this choice when you retire means you will know exactly what you’re entitled to under each option, making it easier to decide what’s best for you.
We have already discussed the new scheme being more generous than the older schemes, but we need to highlight that the retirement age, the point at which you can draw benefits without penalty is much older in the 2015 scheme than the legacy schemes. Therefore, the age at which you wish to draw your pension is crucial to your decision. I see a lot of cases where people are unsure as to what age they wish to retire, and some are opting for retirement and return. Having to make an election now when you may be many years from retirement and unsure of what the future holds would be unfair as it would have significant financial consequences.
The government intends for processes to be in place by 01 October 2023 to support members in making their choice on retirement. Your service for the remedy period will be automatically moved into your legacy scheme until you’ve made your choice.
By 01 October 2023, any continuous service you have between 01 April 2015 and 31 March 2022 will be placed into your legacy scheme. More information will be provided by NHS pensions on how this change will happen, and what to do if this impacts your circumstances in due course. However, for now, all processes remain the same, so there’s nothing you need to do. NHS pensions will contact all affected members directly when action is required.
If members have already retired before the settlement is finalised they can change their pension for the years since 01 April 2015. Retirees from both legacy and reformed schemes who were in service on or before 31 March 2012, and on or after 01 April 2015 will be offered the choice as to which arrangement they wish to be in for the remedy period.
Anything else to consider?
The McCloud Remedy changes will continue to trigger new questions. We are still working on how these changes will affect your ill health retirement pension (IHRP) and if the ‘underpin’ will kick in when you draw your IHRP or just at retirement. These questions will be answered so do keep in touch, as we will endeavour to post news as soon as we have it!
McCloud Remedy Summary
At the time of the pension reform, NHS members closest to retirement were protected from moving to the reformed NHS pension scheme (2015 section) and could therefore remain in their legacy schemes (1995 and the 2008 sections) of their original pension scheme.
Pension members with full protection did not have to move to the 2015 NHS pension scheme at all, while members with tapered protection were permitted to remain in their legacy scheme for longer, with their move to the reformed scheme delayed beyond 01 April 2015.
In December 2018, the Court of Appeal found these protections discriminatory against younger scheme members. This discrimination has become known as the ‘McCloud Judgment’.
The government is now implementing the McCloud Remedy to remove this discrimination and ensure equal treatment for all members of the NHS pension scheme. ‘The McCloud Remedy’ will remove the age discrimination judged to have arisen in the NHS pension scheme. Many of you have received letters about this from your Trust.
If you have any questions regarding any of the issues raised in this article, please do contact your adviser or ask us in the comments box below.