A series of legal cases brought by Firefighters and Judges has big ramifications for doctors with an NHS pension. We asked specialist medical IFA Rachael Hall to give us the details. Prefer to listen to this information then check out our podcast.
What is the problem?
When the government introduced the 2015 NHS Pensions scheme, they provided some members with “transitional protection”. This either prevented or delayed membership of the 2015 scheme, for those who were between 10 – 13 years and 5 months away from retirement, as they were perceived to have “less time to adjust” to the new changes in the 2015 scheme, as the new scheme’s retirement age was pushed back to State Pension Age. A group of Firefighters and Judges objected to this, and successfully bought a legal case to say this discriminated against them on grounds of age. As a result, the government needs to remedy this and a Consultation document (now closed) seeks views on providing qualifying members with the following choice exercises:
- Immediate Choice Exercise – this is a permanent and irrevocable decision. The benefit from opting for an Immediate Choice Exercise is that the member will have complete clarity over the benefit entitlements. However, they will have to make assumptions based on future service, the benefits which may or may not come to pass.
- Deferred Choice Underpin (DCU) – a member will be give a choice at retirement about whether they want their service for the Remedy Period, to be in the Legacy or the Reformed Schemes. The benefit of opting for a DCU, is that the member will be able to decide at retirement the best option based upon known facts. The downside is that benefits will never be truly known until retirement.
Criteria – who is eligible for compensation?
Entitlement to this compensation is dependent upon how many years to retirement as at 31/3/2012, as follows:
- Group 1 – members within 10-13.5 years of retirement should qualify for compensation.
- Group 2 – members who were outside of the above timescales should qualify for compensation.
- New joiners post 31/3/2012 – will not be entitled to compensation.
The Legacy Schemes
This refers to the 1995 Officer and Practitioners Scheme and the 2008 section:
- 1995 Section –
- Officers Section this is a 1/80th plus 3x lump sum. Normal Retirement Age is 60, although some members may have special class status and are able to retire penalty-free from age 55. The scheme revalues the pension on the ‘Best of the Last 3 years’ principle and favours members who are climbing the career ladder or have an upward trending remuneration. Some members have ‘Mental Health Officer’ known as MHO Status, which accelerates accrual after 21 years, at a 2/80th for each complete calendar year, also allowing these members to retire penalty-free from age 55 onwards.
- Practitioners Section – this scheme operates like a career average pension, not that dissimilar to the 2015 scheme, as each years pensionable pay/profit is increased by 1.5% above inflation (now measured by the Consumer Prices Index) which are referred to as ‘dynamising factors’. However, unlike the 2015 scheme, the practitioner’s scheme is very complex and highly nuanced and has a contractual retirement age of 60, although members can retire from age 50. This scheme provides a high level of pension income and suits members with fluctuating earnings.
- 2008 Section – this is a 1/60th scheme with no entitlement to an automatic lump sum, although members can commute pension for tax free cash, at a conversion rate of 12:1 (i.e. for every £1 annual pension given up, the member receives £12 cash). The normal pension age is 65 and enhanced pensions (known as Late Retirement Factors) are provided to those who work beyond the schemes retirement age. The pension is valued as ‘the best average of 3 years in the last 10 years’ and earlier years are uplifted by Pension Increase. The scheme has some other good features, such as ‘drawdown’ which allow a member to draw their pension without needing to retire from all pensionable posts, unlike the 1995 section.
The Reformed Scheme
- This is the 2015 scheme with an accrual rate of 1/54th and pension benefits from ongoing revaluation factors of 1.5% above CPI. There is no automatic entitlement to a retirement lump sum, but members can commute pension (at a rate of 12:1). The normal retirement age is linked to State Pension Age but members can retire early (subject to actuarial reductions) up to 12 years prior to the scheme age. As this is a career average scheme this scheme favours members with static earnings, or those who may have positions of responsibility in earlier years and reduce commitments (essentially pensionable pay) before retirement.So for example, a member with a pensionable (or reckonable) pay of £100,000, would receive the following pension under each scheme design:
- 1995 Section – £1,250 p.a. plus £3,750 tax free cash.
- 2008 Section – £1,666.66 p.a.
- 2015 Scheme – £1,851.85 p.a.
Some members may prefer a higher pension, to others, or a larger tax free cash entitlement, so the scheme design is a personal choice and should be considered on a case by case basis.
The Remedy Period
This relates to the years between 2015 and 2022. After this date, all members will be placed into the reformed scheme and active members will still benefit from the Final Salary link.
How does this affect me?
There are many issues that need to be considered, which have been raised within the consultation document. The following are the main points relating to NHS workers:
This is a particularly complex area as reassessing benefit entitlements between the Legacy and Reformed schemes include differing levels of retirement lump sum. For example, if a member is entitled to a higher pension in the Reformed scheme, how will the remedy work for the tax free cash entitlement? Will it be the case, that the member is only offered a choice of the commuted pension re-adjusted to account for the previous lump sum taken and any early retirement factors?
In general, readjusting benefits could also result in changes to Lifetime and Annual Allowance charges, which also need to be carefully considered. Any income tax adjustments are subject to a 4-year statutory time limit, but members could be offered a repayment vehicle if they opt for a higher pension – if this is the case, then it could result in a situation where a member is unable to “afford” the remedy. It has been suggested that any underpayments could be taken from the lump sum in advance of payment.
Ill Health Retirement
Members who have already or are due to retire on the grounds of ill health, may need to reconsider how their application may be affected by a Choice Exercise, as judgements that have already been made could be reversed under the different schemes. For example, whilst benefits under reformed schemes could be higher, the chances of returning to work in some capacity could be greater, due to the extended retirement age, which could mean the loss of a Tier 2 (enhanced) pension.
Due to the differing retirement ages of schemes, some members might have to defer or suffer an actuarial reduction if they have retired before the schemes minimum retirement age.
Income Tax Adjustments may also have to be made, however, any underpaid tax will not be collected outside of the Statutory 4 year time limit.
Inheritance Tax & Personal Taxation
Discretionary lump sums paid to an estate generally do not count for Inheritance Tax purposes, however, if there were arrears of continuing pension payable in respect of the deceased member those would form part of the estate.
Any increase to a lump sum paid to a nominee, or to a survivor pension in payment might impact the individuals personal tax position; or their entitlement to any income-related state benefits in payment. Any taxes triggered solely as a result of the payments directly related to the remedy would not fall to the member of their survivors. The government also proposes that any professional expenses/costs be reimbursed.
Those members who chose to return to the Legacy schemes for the Remedy Period could be entitled to a tax rebate. Where this is the case the government will compensate the member in full. If a member is subject to an increased Annual Allowance charge, then the normal statutory 4-year time limit will apply. If the additional tax relates to a year outside of the 4-year limit, the government cannot collect the monies.
The consultation advises that Added Pension can be converted to any scheme fairly easily and the relevant limits will be ignored, if breaches relate solely to the Remedy.
Early Retirement Reduction Buy Out (ERRBO) Agreements
If a member chooses to return service to the Legacy Scheme then a taxable refund of contributions will be made. However, the Legacy scheme will close in 2021/22 and from this date on all future service will accrue in the reformed schemes, meaning the member may be subject to higher contributions in order to buy out of the actuarial reduction from age 65.
Some members made decisions about their service, based upon the introduction of the 2015 scheme. The scheme often created higher growth, when combined with the Final Salary linking of the 1995 section and some members chose to opt out in order to reduce their AA charges. Other members chose to apply for certain Lifetime Allowance protections and opted out of the scheme; others cancelled Added Years contracts; in previous Choice Exercises some members chose to move benefits from the legacy to the 2008 section and/or the 2015 scheme. The consultation document seeks views on how to compensate these members. Unpicking this will be complex and professional advice will need to be sought, which will involve additional costs for members.
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Sandringham Financial Partners is authorised and regulated by the Financial Conduct Authority (FCA). This article does not constitute advice.