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Public sector employees need to review pensions

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Public sector employees who hold either fixed or enhanced protection from lifetime allowance charges may need to act before 1 April 2022 if they want to avoid losing their protection.

11th Mar 2022
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The latest change to the taxation of pensions relates to some members of “reformed” public sector schemes (including those for the NHS, teachers, firefighters, police, the armed forces, local government, civil servants and the judiciary) as announced in HMRC’s Pension Schemes Newsletter 137 on 28 February 2022. 

For those affected, urgent action is needed before 1 April 2022.

Who is affected?

Individuals who:

  • Were members of an affected pension scheme prior to 1 April 2015;
  • Will still be in service on 1 April 2022; and
  • Had claimed either: Enhanced Protection, Fixed Protection, Fixed Protection 2014 or Fixed Protection 2016.

They need to contact their pension scheme administrators in order either:

  • To opt out of the “reformed” scheme (whether they are already members or had remained in a “legacy” scheme until now); or
  • To ensure they accrue no new pension benefits after 31 March 2022.

The full explanation is long and convoluted, but I have summarised the key points.

What are “reformed” pension schemes?

Prior to 2015, public sector pension schemes were operated on a “final salary” basis. A member’s pension entitlement on retirement was usually based on the level of annual salary they were entitled to in the best of their last three years of pensionable service.

From 2015, the government changed the method of calculating pension entitlement to a “career average” basis. Here, each year’s actual earnings are factored into the calculation, with adjustments to take account of inflation between the year of service and the year of retirement.

Managing the transition

For new joiners, the two types of valuation are arguably more or less as beneficial as one another. For existing members, however – especially those with most of their working life behind them – the change promised to be confusing, uncertain and potentially disadvantageous, which led the government to introduce transitional rules.

Transitional rules

The pension scheme members were divided into three cohorts:

  1. Those who were within 10 years of their normal anticipated retirement date (NRD) as at 1 April 2012 could remain in a “legacy” scheme subject to the old rules. These members are probably not affected by the new deadline, since they are likely to have already retired.
  2. Members within 14 years of NRD in 2012 could remain within a legacy scheme until 31 March 2022, but would then be moved to a new “reformed” scheme. 
  3. Members with more than 14 years to NRD were moved to a reformed scheme from 1 April 2015.

Mismanaged transition

The problem with the transitional arrangements was that they were clearly and unlawfully discriminatory: they imposed different treatments to these three cohorts based on age, in contravention of the Equalities Act 2010.

This was brought home in two cases brought before the Court of Appeal in 2018 (McCloud and Sargeant). What the court found was that the evident discrimination could only be justified if it “was a proportionate means of achieving a legitimate aim” – which it was not.

Following these decisions (they related specifically to the judicial scheme and the firefighters’ scheme, but the government has accepted that the principle applies across the board), the discrimination will be effectively reversed out. 

Members of cohort 3 – who had been moved to a “career average” scheme in 2015 – will be moved back to the legacy scheme in respect of the period 1 April 2015 to 31 March 2022. This will, so far as benefit accrual is concerned, put them on an even footing with the members of the other two cohorts.

Lifetime allowance protection

When the pensions lifetime allowance (LTA) was introduced on 6 April 2006, certain individuals could claim “protection” against its effect. This protection worked by either:

  • Substituting the value of the individual’s accrued pension rights at a certain date for the eventual LTA at retirement (“fixed protection”, which comes in three flavours: FP2012, FP2014 and FP2016); or
  • Allowing the individual to ignore the LTA altogether, provided they accrued no additional pension rights after 6 April 2006 (“enhanced protection”).

Unfortunately, one of the events that could invalidate those protections was a transfer to, and accrual of benefits in, a new occupational pension scheme (other than in very limited circumstances). The effect of the transitional arrangements and the discrimination litigation has been to introduce a series of twists worthy of a film noir.

Doing the twist

Twist 1: HMRC recognises that, for some individuals in cohort 3, the 2015 transfer to a “reformed” scheme may have triggered a loss of their protections.

Twist 2: The reversing out of the McCloud discrimination (by deeming them never to have left the “legacy” scheme) will now mean that technically they did not lose their protections.

Twist 3: However, with effect from 1 April 2022, no one will be allowed to remain in a legacy scheme, so that the new and final transfer to a reformed scheme would result in their losing once again their newly regained protections.

Saving the day

In order to ensure that an individual’s LTA protections remain unaffected by all these shenanigans, they must – no later than 31 March 2022 – take steps to ensure that they either do not join the reformed scheme (opt out) or that, if already a member, they do not accrue any additional benefits from 1 April 2022. The scheme administrator will be able to assist.

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