Public Sector Pensions Discrimination rectification – prepare complex annual allowance recalculations

The consultation is a result of the Court of Appeal judgement in December 2018 that ruled that transitional protection in the judges’ and firefighters’ pension schemes gave rise to unlawful discrimination.

The Government accepted that the same issue applied to all Public Sector schemes and has been working to fix the discrimination identified.  Essentially those nearer their normal retirement age could stay in the legacy schemes whereas other younger members were forced to move to the 2015 schemes, and this was ruled as discrimination.

To rectify this the same transitional protections are being offered to all members who were in service on or before 31 March 2012 and on or after 1 April 2015, whether they are currently an active, deferred or pensioner member.

The protections will cover the remedy period which is from 1 April 2015, when members were moved into the 2015 scheme until 31 March 2022.  From 1 April 2022 all legacy schemes will be closed for future accrual and all members will be moved to the 2015 schemes. 

The consultation proposes two options

1. Immediate choice

Under this option members would make an irrevocable decision as to whether to accrue benefits in their legacy or reformed pension scheme for the remedy period. For most members this choice would be made in the period shortly after the end of the remedy period. It may be made earlier for some of those who take a pension award before 2022.

2. Deferred choice underpin

With this option, the member initially will be reinstated into the legacy scheme but given the option at retirement to choose to access benefits using the reformed scheme rules, so deferring the choice until retirement.

The clear advantage of option two for the member is that they will know which option is best at the time they take the benefits and the schemes could provide direct comparisons of the actual entitlements available under both schemes.  Whereas with option one the client will have to make their decision based on assumptions as to which will provide them with the best outcome. 

Client’s are likely to be seeking advice to help regardless of the consultation outcome but with the immediate choice option providing the more complex planning decisions. 

Both options cause annual allowance complications.  With the immediate choice option, there would need to be a recalculation of the annual allowance where members choose to return to a legacy scheme for the remedy period.  With the deferred choice option, all members would need their annual allowances recalculated for the remedy period.  In addition, if when they come to take benefits, they revert to the reformed scheme their tax position would need to be assessed again.

Where a recalculation of the annual allowances show the member owes tax, this would be recouped for the four tax years before the decision point.  This is therefore likely to be any additional taxed owed for tax years 2018/19 – 2021/22.  Where the member has overpaid tax the Government will repay this without time limit.

If the deferred choice option is chosen and a member decides to revert to the reformed scheme on retirement, where an annual allowance tax charge arises from the choice, the scheme will compensate members for the charge.

In addition to the annual allowance calculations any members who have taken benefits will need their Lifetime Allowance test recalculated if they revert to the legacy scheme and again any taxes due in the timescales paid or refunded.

Some schemes also have different contribution rates between the schemes and these and the subsequent tax positions will also need to be considered.

Whichever option is chosen it will create considerable tax complexity and clients will are likely to be seeking assistance from financial advisers to help.

As a starting point the Government recommended individuals retain their paperwork related to tax from April 2015 onwards. This would include:

1. all self-assessment returns,
2. P60s,
3. documents relating to any private pension schemes,
4. the annual statements from pension scheme administrator and documents relating to any other private pension schemes.

Advisers who have clients who are members of any of the Public Sector pensions schemes would be well advised to make sure their clients are made aware of this recommendation.