Reform of public sector pensions has been one of the underlying aims of the government, moving individuals from final salary to career average schemes. From April 2022, legacy final salary schemes will close to all future accruals.
So what will that mean for individuals approaching retirement with a public sector pension?
It helps to briefly explain the journey and legal challenges behind public sector pension reform.
The aim of the government’s pension reform was to move employees away from generous final salary schemes to ones based on career averages, known as career average revalued earnings. With the exceptions of the police, firefighters and armed forces, pension schemes are also to be linked to the state pension age.
However, the government’s reforms were challenged through the courts in two cases by the judiciary, the McCloud judgment, and firefighters, the Sargeant judgment, with the court ruling that the reforms were discriminatory against those who were close to retirement.
The government responded with a remedy period to cover pension accrual between April 2015 and March 2022.
During the remedy period all members will continue to accrue benefits under old legacy schemes but with a ‘deferred choice underpin’, giving members the choice to draw benefits accrued during the remedy period under the new or the old basis. This is, however, only available to eligible members – broadly, those who had accrued benefits both before April 2012 and after March 2015.
Legacy schemes will now close from April 2022 for all future accrual and the Government are to introduce legislation to that effect in due course. In addition, they have given the schemes themselves a deadline of October 2023 to deliver the retrospective changes required for the remedy.
Who will be affected?
Ultimately the changes will impact anyone who continues to accrue benefits under a public sector scheme. In the short term, however, anyone who is approaching retirement probably has the most to be concerned about, given the lack of certainty that scheme administrators can currently provide to members, particularly in terms of what their benefits will look like. We are confident that this is temporary caused by a lack of clear information. It is worth remembering that the transitional protection built into the changes will protect most individuals.
What are the likely tax implications
Most public sector pension schemes are HMRC registered which means that income tax relief applies to contributions and retirement benefits, when paid, are taxable. However members of the old Judicial scheme will be affected the most as they are currently outside of the registered regime and therefore transferring to an HMRC registered regime will have more tax implications for those members. Other tax implications then come into play with a registered scheme including testing whether an annual allowance charge or lifetime allowance charge applies.
Protecting your pension
Individuals may end up breaching their annual allowance by accruing pension benefits in excess of the permissible contribution limit in a given tax year. Similarly, there is a limit on the overall fund size that an individual can accrue in a lifetime. There will be a test to check if there is a lifetime allowance charge upon drawing benefits as well.
Forewarned is forearmed so the key is to seek guidance for a suitably qualified individual if they are unsure.