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Every McCloud case has a silver lining - news article image

Every McCloud case has a silver lining

15 Jun 2021

6 minute read

At this point you may wish to switch off if you are not a nurse, doctor, civil servant, teacher, in the police or fire service, in local government or even an academic in a scheme other than the USS. You can also, to some extent, breathe a sigh of relief that you probably know what your pension situation is, or at least are able to work it out and do anything you need to do by way of tax returns. 

If however, you are in an occupation where you are in a Statutory Pension Scheme, or were in one in March 2012 and still in after March 2015 (2014 for the LGPS but 2015 will be used here for ease), then McCloud is something that you’re going to need to understand, at least in principle.

The first and most important thing to know is that there is absolutely nothing that you need to do now. Indeed, there is absolutely nothing that you can do now, so relax, sit back and carry on as usual.

As a bit of background, the age discrimination cases brought by McCloud (Judges Pension) and Sargeant (Fire Service) challenged the way that the government tried to protect people close to retirement from changes to the likes of the NHS, Teachers and Local Government Pension Schemes. What they had done was introduce a new type of scheme, which many think is less valuable, but said to people close to retirement that they could remain in the old scheme. This has been ruled to be discriminatory to younger members and so in February this year the Government published how they were going to correct this. 

If you are one of those who are in the NHS, TPS, LGPS, CSPS or similar pension scheme and were told in 2015 that your pension scheme was changing, well it did, but it hasn’t, although it will – and that’s where things become fun !

In order to correct the age discrimination, rather than take the option to say to older members, many of whom may have retired since 2015, that their pensions were going to change, the Government has decided to rewrite history and put everybody back into the old pension scheme until March 2022 and then move everybody, no matter how old or young, into a new scheme at that point. 

So far so good however, the view that the old scheme was better than the new scheme is too simplistic. There will be people for whom the new scheme provides better benefits than the old scheme, depending on salary progression, retirement date and other personal circumstances. 

The Government then had two choices. They could work out what position every member was in at March 2022 based on both old and new schemes and offer a choice of the two at that time. That would be an easy decision for someone retiring in say April 2022 but difficult for someone with years still to go as they would have to estimate what things might be like when they retired in maybe 30 years’ time. So they went for the option of waiting until people retire and giving them the choice of old scheme or new scheme benefits.

What this means is that the pension you thought you had built up since 2015 will now all change. However, when you get to retirement you might decide that what you had had, was better than what you were given, and if so, you will be able to revert back to what you have at the moment.

Pushing this down the road gives the Government and the schemes a breathing space, as well as making the eventual decision easier for you. Initially, schemes will be able to focus on those who have retired or died during this period and have until March 2023 to provide the detail on how each year is now different, so until then you may not know what your position really is. 

For you, the short term impact is that:

  • any Pension Savings Statement which you received from your scheme is wrong and this may well include one that you receive for the 2020/21 tax year and maybe even 2021/22;
  • as a result, every tax return that you have done since 2015 could be wrong, including the one you are about to do for the year to 5th April 2021 and possibly even the one for 2021/22; 
  • any payment of tax or election for Scheme Pays because you exceeded the Annual Allowance will be wrong, including for 2020/21 and possibly 2021/22; 

So when the information finally comes through, you could have to redo every tax return that you have done since 2015/16. The advice from every scheme is to make sure that you have kept all your records just in case. 

However, until you have the information from your pension scheme of how things have changed, you should continue to do everything as normal; check your Pension Savings Statement; submit your tax return; make your Scheme Pays election; pay your tax. 

Because of the way the schemes work, it is quite likely that, if you have paid tax over the last six or seven years as a result of pension increases when the figures are recalculated you will be owed tax back. If the normal time limit for reclaiming tax has passed, you will still be able to reclaim overpaid tax in this instance.

If when you retire you choose to revert to the benefits you have currently, the Government will not then re-recalculate everything and ask you to pay the extra tax back. 

There is also a chance that you may owe more tax than you paid previously. If the normal time limit for you to pay further tax has passed then the Government has said that you will not have to pay it but you will need to pay any extra that is within the normal time limits. We believe that in this case you will have the option to use Scheme Pays rather than have to find the money for it but each case will need to be considered on its own merit. 

As you can imagine, our Tax department is gearing up for what could be a very busy time from next year onwards. We are also looking at ways in which we can help make things easier for you to understand what is happening and, importantly, to check that the revised statements are correct. Meanwhile, if you do have questions about what is going on and what it could mean to you personally, we are, as always, here to help.

Every McCloud case has a silver lining - news article image


Ed Gibson

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