Overview
The McCloud Judgment announcement in February 2021 has brought one of the most significant changes to the NHS Pension in recent times. However, many scheme members are unaware of how this impacts them now and at retirement.
The background
In 2015 the government reformed the majority of public sector pension schemes. Members of the NHS Pension were moved to the reformed 2015 scheme from the legacy 1995/2008 Scheme.
The reformed pension schemes are based on career average revalued earnings (CARE) as well as an increased normal pension age. These reforms did not apply to those members who were closer to retirement. They remained in their legacy schemes with ‘transitional protection’.
The Court of Appeal later found this to be discriminatory against younger members in the judicial and firefighters’ schemes – the government accepted that this discrimination existed in all schemes where transitional protection was introduced and would provide a remedy to remove the discrimination.
Who does this apply to?
The remedy will apply If you were a member of the scheme on 31 March 2012 and continued in service between 1 April 2015 and the 31 March 2022 (or your retirement date if earlier), or were a member of the scheme on 31 March 2012 then left service but returned within 5 years.
How will the government remove the discrimination?
‘Transitional protection’ will be removed retrospectively from the scheme. In its place, all members in scope will be given a choice for how their benefits accrue during the remedy period (1st April 2015 – 31st March 2022). Members will be able to choose between their legacy scheme (1995/2008) and the reformed scheme (2015).
When will a choice need to be made?
The government published a consultation in July 2020 to look at how best to do this. The consultation set out two ways, Immediate Choice, making a decision in the near future, or Deferred Choice Underpin, making a decision when you take your benefits.
In February 2021 the government has decided to implement a ‘deferred choice underpin’ which was the approach preferred by the majority of the respondents to the consultation. Initially, all benefits accrued during the remedy period will be moved back to their legacy scheme on 1st April 2022. They will then be
able to choose between the legacy scheme and reformed scheme, for the remedy period, when they take their benefits.
Why not permanently move all members back to the legacy scheme?
Members are being offered the choice because automatically moving all members back into the legacy pension scheme would leave some worse off, particularly if you have had a large pay increase over the past few years. It is important we consider your own personal circumstances, for example:
- Age
- Health / longevity
- Career path
- Need for income / lump sum
- Legacy planning
How could it affect your past and future tax liabilities, annual allowance and lifetime allowance?
Initially all pension members will be returned to their legacy scheme (1995/2008 scheme) for the
remedy period (1st April 2015- 31st March 2022) and those that move back to the 1995/2008 scheme
will need their annual allowance position recalculated for the remedy period.
If the member owes tax, this would be recouped for the four tax years before the implementation. This should therefore be any additional taxed owed for tax years 2018/19 – 2021/22. Where the member has overpaid tax, the Government will repay this for the whole of the remedy period (2015/16 – 2021/22).
1995/2008 Scheme closed from 1st April 2022, all members moved to the 2015 scheme.
What if I have opted out or ceased my Added Years contributions due to high annual allowance charges?
Members in this position could apply for retrospective membership if they can argue that they would have taken a different course of action had they have known that continued membership of the legacy scheme were an option. If they successfully agree this retrospective membership, their employee and employer superannuation contributions would need to be made up to date. If you are in this position, consult a Financial Planning Adviser soon to explore the benefits and costs of this option.
Questions You Will Need To Answer
- Which pension scheme is best for me?
- How does this affect NHS pension
growth in previous years?
- How does this affect annual allowance
calculations?
- How does this affect you if you paid an
annual allowance tax via scheme pays
or through your tax return?
- How will this affect lifetime allowance
calculations and individual or fixed
protection calculations?
- How does this affect those already
retired?
- How about those who have retired due
to Ill Health who failed the Severe Ill
Health Condition (SIHC) test?
Further Advice On the McCloud Judgement
The NHS Pension Scheme is complex and especially with the recent McCloud changes, it is now more important than ever to get financial advice from experts in this area. To speak to your local medical financial expert from Capstone Financial please:
