Pensions Update 2021
Updated: Apr 12, 2021
The latest news affecting the pension position of hospital doctors is good. As you are all (painfully) aware in 2015 the government introduced the reformed 2015 CARE Scheme, into which all active members would transition over a period of time with a built-in policy protecting members closest to their Normal Pension Age (NPA) allowing them to remain in their legacy schemes.
This transitional protection was found by the Court of Appeal to be potentially discriminatory against younger members across all public sector pensions and so the matter had to be addressed, so last year HM Treasury (HMT) ran a public consultation to better understand the effects of actions taken and the concerns of those affected. They arrived at a choice – a deferred choice underpin or an immediate choice exercise. This choice was between deciding now what action each person should take; or doing so on retirement. Naturally it is almost an impossible task to understand which scheme would have proven the better choice at a point in time (now) when all of the unknown variables cannot be factored into the calculations, hence the government have announced there will be a deferred choice underpin.
1. Eligible members who were moved to the reformed pension scheme in 2015 (or later if they had tapered protection) will be moved back into their legacy pension scheme for the period during which the discrimination occurred, between 1 April 2015 and 31 March 2022.
2. At the point benefits are paid, i.e. at retirement, eligible members will be provided with the relevant information to enable them to choose to receive legacy pension scheme benefits or benefits equivalent to those available under the reformed pension scheme for service between 2015 and 2022 when all members will be transferred. Deferring the choice until the point benefits are paid allows individuals to decide which pension scheme is more beneficial, based on facts rather than assumptions of future careers, health, retirement, etc. The level of both pension scheme benefits will be known at retirement.
3. From 1 April 2022 all who continue in service as active members of the pension scheme, will become members of the reformed scheme, regardless of age, thus there will be no discrimination on those grounds.
Individuals who fall into the scope of the changes:
· Were members, or eligible to be members, of a public service pension scheme on 31 March 2012;
· Were members of a public service pension scheme between 1 April 2015 and 31 March 2022; and
· The two periods above were continuous (or treated as continuous under the scheme regulations, including those with a qualifying break in service of less than 5 years).
For members who retire before the deferred choice underpin is implemented and have a period of relevant service between 1 April 2015 and 31 March 2022, will be offered a choice once the legislative changes have been made. The choice will be retrospective and backdated to the point that payment of pension benefits began. This will however be a complex matter as pension schemes are limited in law by what actions they can take and if unintended consequences can be dealt with prior to the change in that law. In all cases where an individual chooses a revised pension award, this will be backdated to the date their pension award relating to the remedy period was originally made.
Any meaningful interaction with the tax system will have to wait until the law is implemented and we have some idea of how the deferred choice underpin will affect such aspects like pension savings’ growth and excess tax charges. No doubt many of you will be wondering if there will be changes to your annual allowance tapering and to the tax charges arising as a consequence of having growth in excess of the annual allowance and of being a member of more than one pension scheme and all the horrors this has thrown up since annual allowance tapering was introduced for the 2017 fiscal year.
At this point in time there is little to be gained from performing iterative calculations as to estimated pension growth in the legacy scheme compared to what has happened, as each doctor will not yet be in a position to make any changes to their choices, as the legislation has not yet come into effect.
For those who chose to elect for their schemes to pay their pension excess tax charges, the forms SPE2 completed can be altered to take into account the actual position once the best outcome is known, because the differences between the tax excess calculations can be accounted for between the schemes and HMRC before retirement, when the choice has been made.
For those who have paid the tax excesses themselves, the government have announced that any unintended consequences will be dealt with via appropriate mechanisms once the complexities are considered and the law is changed. Of course this causes concern as HMRC usually allows alterations for up to 4 years only, meaning that changes outside of these time limits are subject to restrictions. Our proposed course of action will be to identify those who have paid any excesses from their own resources and to advise accordingly as to what actions should be taken at this point.
There are of course other tax consequences resulting from the proposed changes, for example:
Different levels of pension contributions being deducted by a change in scheme, which may affect the individual’s tax position as their taxable pay from employment will be different.
The rate of accrual and the consequences of changes to pensionable pay may increase or reduce the pension savings’ growth attributable to each scheme each year.
The knock-on effect of this will necessitate recalculation of the pension savings’ growth to be tested against a revised annual allowance.
Changes to growth will alter both the threshold and adjusted income levels and the potential tapering effect.
The tax paid as a consequence may be more or less than has been notified to HMRC, and is likely to need rebalancing.
Individuals who have voluntarily elected for private pension schemes to pay their excess tax charges, may need compensation to be placed in a similar position to before the discrimination caused a reduction to their pension pot.
Upon retirement a tax-free lump sum is calculated and this may be increased or reduced, as may the pension benefits already paid out causing extra tax consequences as taxable income levels may differ. Where members have triggered lifetime allowance charges adjustments may also be required, if the retired member’s accrual of benefits has changed.
Any members who have retired on the grounds of ill-health or any eligible member who has died since 1 April 2015 will have their benefits assessed as a matter of priority. This will include the survivors’ pension benefits. Schemes will inform surviving beneficiaries of the results of the review of benefits and if there is an increase and the higher amount will be paid with their agreement.
The choice between benefits will be given to the late member’s surviving spouse or partner. If benefits are also paid to a child who lives with this decision-maker the rules around total survivor benefits payable will apply. If the child lives elsewhere, any decision will not affect the child’s pension.
Should you have any questions please let us know as we are always happy to talk through or to advise on individual circumstances. This is a complex area to which no-one has all the answers yet, so avoiding knee-jerk reactions and waiting until we are provided with remedies upon which to cogitate, is the best plan – i.e. sit tight and let us see what unfolds, but as stated at the start, this is good news.