October 6th 2024 was the date by which public sector pension schemes, such as the Teachers’ Pension and the NHS, should have issued revised Pension Savings Statements to members affected by the McCloud Judgement. For those who may have to amend tax returns, claim tax back, pay more tax or amend a Scheme Pays Election, the tax people at HMRC have produced a handy little online tool called “Calculate your public service pension adjustment”.
Excellent
However, the McCloud Guidance Notes suggest that this will not be for the faint-hearted ! 25 pages of Guidance Notes, covering 135 pieces of guidance, following points A) to X) that cover information required before you begin the process of using the system. It’s quite the read.
Backing up a little, this whole situation came about because in 2014/15 the public sector pension schemes changed how they calculated what pension you would get (and also the normal pension age).
In the old system you built up years of service and at the end of the day got a pension calculated by applying the number of years to your “final pensionable salary”. The new one changed this to getting an amount of pension each year related to that year’s salary, which would then increase by inflation until you retired.
When the change was made, there was a general view that it would be unfair to make people who were quite close to retirement change. It was thought that as they would have been planning their retirement around the old system, changing things a few years before they retired wouldn’t give them time to change their plans. . Which sounds reasonable, so not everybody switched from the old system to the new system
However, it didn’t seem reasonable to younger members necessarily. The general view was that the old system would produce a bigger pension and that pension could be drawn, without penalties, at an earlier age. So for those who were forced to switch into the new system, the fact that somebody slightly older than them wasn’t forced to, seemed inherently unfair. Age discrimination in fact.
This protection of older members was therefore challenged through the courts, deemed discriminatory, and the schemes had to reverse the changes they had put in place, the McCloud Remedy. In essence, scheme history from 2015 (or 2014 depending on the scheme) was rewritten and everybody would be treated as if they were a member of the old system up to 31st March 2022, when everybody was then treated as being in the new system.
Rewriting history is anything but simple. Over the seven (or eight) affected years, higher earners in particular will have been potentially liable to tax on the pension that they built up each year.
The Annual Allowance limits the maximum contribution on which you can get tax relief. Over the years the Allowance has changed and there was the introduction of a Tapered Allowance system for the highest earners. For a member of a Defined Benefit scheme, what was used to determine “contribution”, was the increase in the pension value each year. What that did is to create a tax charge if your benefits increased by more than a certain amount.
So if you go back and change what the benefits were each year because you move someone from the new system to the old system for seven years, then you change what the notional contribution was for each of those years. If you change the contribution, then potentially you create, increase, reduce or remove a tax charge also.
Scheme members who had a tax charge could, if they met certain criteria, ask the pension scheme to pay that tax for them. If you have a tax bill now based on a pension benefit that you won’t get for years, you may not have the money to pay it. So having it paid by the scheme and your benefits reduced slightly to cover the cost was a sensible approach.
Potentially there are seven years’ tax returns to amend. Potentially there are seven years’ Scheme Pays elections to amend. You may have changed jobs during that period, changed pension schemes, paid into more than one pension scheme, all of which will have an effect. Due to the way pensions and the Annual Allowance works, if there is a change to your position seven years ago, to know what the impact of that is would require information going back even further (information from 6th April 2010 is the furthest back that the HMRC tool wants).
This is why the “Before you start” section has notes A) to X) covering what information you will need to use the system. This, plus the fact that there are other issues where people have retired and maybe paid a Lifetime Allowance tax charge, is why there are 25 pages in the Guidance Notes.
Time, if you haven’t already, to find that handy accountant who understands what is going on and can help. They will be easy to spot as they will be the ones who, having built up a client base of GPs, Consultants, senior staff at schools, colleges and Universities, can be seen wandering gaunt-faced around the city in search of a light at the end of the tunnel.
Meanwhile, over in the corner smiling sweetly as they sip their preferred choice of alcoholic or non-alcoholic beverage, you will see a group known as the Local Government Pension Scheme members.
LGPS members were also impacted by the decision to change from the old style Final Salary system to the new style Career Average Revalued Earnings system. They too had the issue of having to deal with older member who were close to retirement, possibly retiring in the next few years. However the LGPS took the decision to cater for this by moving everyone into the new scheme regardless and introducing an “underpin”.
The underpin meant that for affected members, the scheme ran two benefit calculations, the old style and the new style, and promised to give them whichever was the higher.
So what they’ve done following the McCloud judgement is said to all eligible members (effectively those who were members at the time) that they will do the same for them. As a result they don’t have to go back and rewrite history, amend tax returns, change Scheme Pays elections, because all there is, is a promise that when a member retires, the scheme will do two calculations and give them the higher pension, whichever way that works out.
Admittedly the scheme has had a lot of work to do because the original underpin rules had flaws that they’ve had to correct, but for the members, compared to 25 pages of McCloud Guidance and A) to X) of notes on information needed, the run up to Christmas is looking a lot less hassle.
Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future
