McCloud Remedy (or Public Service Pensions Remedy)

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What is it?

Back in 2015, the government introduced reforms to most public service pension schemes. They changed schemes from a ‘Final Salary’ basis to a ‘Career Average Earnings’ basis. However those scheme members that were close to retirement (and met various other criteria) were protected from moving to the new career average earnings scheme and could therefore remain in their existing final salary scheme, if this was more favourable to them.

The Court of Appeal later found these protections to be discriminatory against younger members and have since implemented the McCloud remedy to remove this age discrimination.

The remedy is made up of two parts:

1. To ensure equal treatment from 1 April 2022, all active pension members are now in the ‘Career Average Earnings Scheme’ not the old ‘Final Salary Scheme’.

2. To address the inequality that has already occurred, affected members will be offered a choice about their pension benefits for the period over which the inequality occurred, 1 April 2015 and 31 March 2022 for most schemes not including judicial or local government schemes (this is known as the remedy period).

Who does it affect?

It affects most public service pension schemes covering:

• civil servants
• the judiciary
• the armed forces
• local government workers in England, Wales or Scotland
• teachers in England, Wales or Scotland
• health service workers in England, Wales or Scotland
• fire and rescue workers in England, Wales or Scotland
• members of the police forces in England, Wales or Scotland
• members of a new public body pension scheme

If you are/were a member of an affected public service pension scheme, you will likely be affected by the McCloud remedy if:

• You were a member of a public service pension scheme before 1 April 2012
• You were a member of a public service pension scheme in the remedy period (between 1 April 2015 and 31 March 2022 for most schemes)
• You have not had a disqualifying gap (a period of more than 5 years when you were not paying into a public service pension scheme) between 1 April 2012 and 31 March 2015

The remedy affects active members, deferred members, those already taking their pension benefits, as well as deceased members.

Please note, the rules may vary depending on the scheme you were a member of at the time. If you would like to understand the full details of your scheme, please refer to their website.

What happens if I'm affected?

If you’re affected by the changes, you’ll be asked if you would like to receive final salary or career average earnings scheme pension benefits for your membership between 1 April 2015 and 31 March 2022. I If you do not make a decision, the scheme administrator may decide for you.

Depending on the route you select it may alter the amount you have tested against the pension annual allowance or the lifetime allowance for the tax years 2015 to 2016, through to the 2022 to 2023 tax year, and this may therefore need addressing with HMRC.

What to do?

Start by using this tool to work out new, reduced or extra lifetime allowance or annual allowances charges that you may have to pay:

Calculate your public service pension adjustment - GOV.UK (www.gov.uk)

Each public service pension scheme has different key dates and processes for responding to these reforms and we would love to help you understand your scheme and pension more thoroughly. So if you or someone you know has a public service pension and would like to better understand how the McCloud remedy affects them, please don’t hesitate to reach out to your Harding Financial Planner or contact our team at [email protected] or by calling us on 01483 802010.

And don’t forget - some schemes provide an allowance towards the costs of financial advice in this area or against direct financial losses or tax losses incurred due the McCloud remedy.

Important notice:

This article has been based on our understanding of the new rules as we understand them at the time of publishing and could be subject to change.

The Financial Conduct Authority does not regulate tax advice.

This article should not be taken as advice.

Tax planning is a complicated area and we would recommend you consult a qualified professional to understand the impact the above rules may have on your personal situation.