The Government have now responded to the Consultation process – a copy of the Consultation paper is attached for your reference and the salient points for your benefit are summarised below.
By way of background, when the government introduced the 2015 NHS Pensions scheme (pushing back the retirement age to the State Pension Age), they provided some members with “transitional protection” which either prevented or delayed membership of the 2015 scheme, for those who were between 10 – 13 years and 5 months away from retirement. In December 2018, the Court of Appeal found this to be discriminatory against younger members and the government has since been taking steps to fix this.
The Court ruling, known as the McCloud Judgment
- In summary, eligible members will be given a choice of ‘Legacy’ (1995/2008), or ‘Reformed’ (2015) membership in respect of service during the period 1 April 2015 and 31 March 2022 (the ‘Remedy Period’).
- The two options in the consultation (immediate choice or ‘deferred choice underpin’ DCU) differed primarily in the point in time at which the decision would be made by the member. The decision has been made that members will be offered a ‘deferred choice underpin (DCU)’ i.e. a choice immediately before retirement – which is a sensible and most appropriate approach i.e. making a choice at this time allows you to accurately compare benefits, taking into account the variables of earnings, career paths, retirement age etc.
- For those members who have enjoyed ‘tapered protection’ i.e. moved into the 2015 section after 1 April 2015, but before 31 March 2022, there will be an option to transfer membership for the whole ‘remedy period’ into either the Legacy (1995/2008), or Reformed (2015) section, but not a mixture of the two.
- All pensionable service for active members beyond 1 April 2022 will do so as members of the Reformed (2015) section.
- There has been significant concern over any resultant tax implications. Detail of this is set out from 2.83 of the attached paper. Our initial interpretation of this is summarised as follows:
- Members are deemed to have accrued benefits in their Legacy Schemes, rather than the Reformed Schemes, for the Remedy Period, until they make that choice.
- Members will be legally restored to Legacy membership by 2023 in respect of the Remedy Period. This will retrospectively alter the pension benefits accrued, which could change the AA liabilities for each of the tax years falling within the Remedy Period.
- Most of these members are likely to see a reduction in AA charge owed.
- Members who paid an AA charge up front will receive a refund.
- If a member used Scheme Pays then the associated pension debit will be amended as appropriate.
- In cases where additional AA charge is owed, the member will have the opportunity to utilise Scheme Pays if they do not want to pay the charge up front.
- If a member then faces an increased AA charge as a result of choosing Reformed Scheme benefits, the Government will ensure they do not bear the cost of any additional AA charge that is directly caused by the member exercising that choice.
Our view
Overall this is very positive news but it does come with a number of challenges. The NHS Pensions will have to recalculate and redistribute all Annual Allowance Inputs between 2015 and 2022, which then kicks out a number of issues in respect of Annual Allowances, Voluntary Contributions, Inheritance Tax, amendments to personal Tax returns and scheme pays election forms etc – all of which need to be carefully and proactively planned, especially for those who have taken retirement.
The unravelling of all this will not happen until 2023 so there is no immediate action. Given the administrative burden which they recognise they are placing on members (or their professional advisers), it is strongly advisable for members to speak with their Financial Advisor sooner rather than later, in particular to discuss their pension contributions for the last six years and for the year ahead.
Please note, as Accountants we are unable to provide Financial Advice so if you have any queries in respect of the consultation please divert these to your IFA.