This blog is written for those in public sector pensions who are interested in how their pensions in retirement are likely to be affected by Government interventions.
It looks at the difficult areas for those in defined benefit schemes, the Annual and Lifetime Allowances (and the AA taper). This is particularly topical as we anticipate changes to legislation in the upcoming autumn statement
NEW: Health Secretary Steve Barclay is to meet the UK Chancellor to discuss the #pension taxation issue driving #NHS doctors to reduce their hours or retire early.
Speaking in the Commons, Barclay said the #pension issue was “important” and he was meeting Jeremy Hunt today.
— Josephine Cumbo (@JosephineCumbo) November 1, 2022
It contains an explanation explanation of how the McCloud judgement and these tax matters will impact those in the NHS Pension , using a thread of tweet from Tony Goldstone.
The Government has confirmed that there will be changes to all the main public service pension schemes, including the LGPS, to remove the discrimination and we also expect to see changes in the taxation of contributions
Focussing on LGPS
One of the largest public sector schemes is for those in local government or in the private sector but retaining rights to the LGPS scheme,
The McCloud judgement will not impact all public sector schemes in the same way. For instance, the reforms to public sector pensions agreed in 2012 were implemented differently in the Local Government Pension Scheme (LGPS) to the Fire and Judicial pension schemes.
The LGPS introduced a new scheme in April 2014 for all members, however an underpin was introduced for members who were in service on the 1 April 2012. This underpin was based upon the same principles as the protection arrangements that were deemed unlawful age discrimination in the Employment Tribunals brought against the Firefighters’ and Judicial Pension Schemes.
As for LGPS, the underpin ensured that members of the scheme who were in service at 1 April 2012 and meet certain age criteria would have their benefits calculated using the better of the 2008 rules or the 2014 rules.
The Government have therefore conceded that the underpin needs to be amended and have launched a consultation on amendments to the underpin in the LGPS. The proposal in simple terms is for the underpin to apply to all members who were in service on the 1 April 2012 until the 31 March 2022.
The qualification for the proposed revised underpin continues to be only for members who were in service on the 1 April 2012. Those joining the local government pension scheme after this date will not benefit from the revisions to the underpin.
How changes are affecting you – if you are in the NHS pension scheme.
2/ To understand “McCloud” let’s rewind to yesteryear- you gave a lifetime of public service & (deservingly) got a good “final salary” pension.
Broadly in 1995 (or “legacy”) pension scheme, each year you got 1/80th of your “final salary” as a pension & 3/80th a tax free lump sum
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
4/ So roll on 2006-08 & government were worried about affordability of the scheme. Life expectancy was increasing so people were in retirement longer. So they made the scheme more expensive & introduced a new “2008” section for new entrants. The 08 scheme removed the lump sum pic.twitter.com/G1h0UxPZM9
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
6/ So sorted? They made the scheme more expensive for all, and introduced this new scheme with later retirement to make it more sustainable. And around the same time in 2007/08 they also introduced two new taxes – lifetime allowance (£1.5m) and annual allowance (£255k).
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
8/ Similarly annual allowance was based on how how much your pension grew each year. Again as no real “pot” this was estimated (19x pension growth) – but at an AA of £255,000/yr this was a tax to stop tax avoidance in the super-rich – not hardworking public sector workers.
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
10/ But in 2011 the coalition gvmnt had their eyes on wider reforms across the whole public sector. So they asked Lord Hutton to look at affordability of all “final salary” schemes (ignoring that the NHS had just reformed already) and making sure the taxpayer was protected pic.twitter.com/QC1zRvpnVl
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
12/ Part of that deal was a “fixed cost” or “cost cap” to taxpayers. If schemes got to too expensive (cost cap ceiling breach) i.e. people living longer, would be made less generous. If scheme got too “cheap” (cost floor breach) i.e. pay rises lower, would be made more generous
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
14/ Lord Hutton warned government not to “protect” members close to retirement. After all they had most accrued “legacy” benefits.
Government ignored him and decided to either fully protect those closest (full protection) or just behind this cohort (tapered protection)
Whoops pic.twitter.com/SaJLjfZrQE
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
16/ And in 2016/17 government pressed on with one of the most ill informed tax policies ever implemented – the “tapered” annual allowance. This further reduced the AA down to a minimum of £10k, and now (20/21) a minimum of £4k (yes from £255k) for the highest earners.
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
18/ Also crucially important to realise timing of these cases is v important. Too early – i.e. in 2015 – and government can remove discrimination by “levelling down” i.e. removing the (illegal) protections for all – this would have put those who received it in a worse position.
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
20/ If you were a member of the scheme on 31/3/12 & in service during the remedy period (2015 -22, or your retirement date if earlier), you will be asked to decide which pension scheme benefits you would like to receive for that period – “legacy” (1995/08) or “reformed” (2015)
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
22/ First thing to say is *don’t worry, there’s no rush*. Under ”DCU” or deferred choice underpin – you choose the best pension (for 2015-2022) either legacy 95/08 or reformed ‘15 at *your retirement*. That’s good, you can always choose the best pension when it is known.
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
24/ AA Tax – this is where it starts to get complicated. During the legacy period AA tax rules changed twice, and in 19/20 in England & Wales there was a compensation scheme for clinicians with AA. This means there are 4 different tax periods! pic.twitter.com/8JOp4JjWCC
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
25/ Members need to calculate AA for 7 years both legacy & reformed scheme. Pension schemes have till October 2023 to issue information to help you with this. For tax, members will ALL be assumed initially to have stayed in the legacy scheme.
contin/ 26.. https://t.co/jSvpkEyzj0
— Dr Tony Goldstone 💙 (@goldstone_tony) February 13, 2021
There are many other public sector schemes not covered in this blog. The police, civil service, armed forces and teachers schemes are all impacted in similar ways, I will be focussing on these schemes in the months to come as the likely uprating of benefits due to the spike in inflation will make many of these issues relevant to an even wider section of public sector pension membership.
Do you remember the intro of the AA and LTA were know as “pensions SIMPLIFICATION”?
My head hurts just reading this blog. I can see dinner party conversation with many GPs who have not retired will turn to this complex 7 year assessment process. I had better swat up.