In July 2020, the Government published a set of proposals, which were designed to alleviate age discrimination against those who were moved into the reformed NHS Pension Scheme (NHSPS) in 2015.
In February 2021, the Government published its response to the consultation confirming the approach that would be taken. This article answers some common questions you may have around this and what it could mean for your finances.
What is the background to these changes?
In April 2015, public sector pension schemes were reformed, with most members moved into new career average arrangements. Following consultations with member representatives, transitional protections were put in place to protect those close to retirement. These protections meant that members within 10 years of retirement on 31 March 2012, would not move into the reformed schemes, usually referred to as the 2015 schemes.
It also meant that those between 10 and 13½ years from retirement would move to the reformed schemes, but later.
In December 2018, the Court of Appeal found that these transitional protections unlawfully discriminated against younger members of the judicial and firefighters’ schemes. In July 2019 the Government accepted that the judgment applied to all the main public service pension schemes, including the NHS.
The 2020 consultation was the Government’s remedy to remove this discrimination from all public sector pension schemes. In February 2021, the Government confirmed they would proceed with the Deferred Choice Underpin (DCU) option as a way to remove the discrimination.
Who is affected?
The DCU applies to the following:
- All members who were in service before 31 March 2012 and on or after 1 April 2015. This includes members who were in service on 31 March 2012 and then took a qualifying break of less than five years. This includes members who left pensionable service, or who took their pension benefits, after 1 April 2015.
- All public sector schemes including NHS, Teachers’, Local Government, Armed Forces and Judicial.
What is the impact of these changes?
As some members will benefit from moving to the reformed scheme, the Government will give members a choice. This choice is which schemes they wish to receive benefits from during the period from 1 April 2015 to 31 March 2022, also known as the remedy period.
The DCU means that members will be asked to make their choice when they take their benefits. This allows members to make a decision based on how their career has progressed, therefore limiting the chances of members making the wrong choice.
Between 1 April 2022 and 31 October 2023, all eligible members will be retuned to their legacy scheme for this remedy period.
By giving schemes until October 2023 to update their regulations, the Government is giving then sufficient time to put in place adequate IT systems and to communicate with all affected members. Those members who have already taken benefits will be asked to make their choice as soon as possible after 31 March 2022. Their choice will then be applied retrospectively.
All active members will be moved into the reformed schemes on 1 April 2022. This will mean that anyone still contributing to the scheme on 1 April 2022, will be moved into the 2015 schemes.
What are the tax implications?
As part of the DCU, all members will be moved back into the legacy scheme and their Annual Allowance reassessed, which for many may mean a reduction in their allowance. These members may receive a refund or be able to have their Scheme Pays corrected.
Members will not be able to apply for refunds until after they have been moved back into the legacy schemes. When the choice is made, there may be a further charge, which will be covered by the Government.
The Lifetime Allowance calculation will be based on the benefits the member has selected for the remedy period, through either the legacy or reformed schemes.
What does this mean for GPs?
Affected GPs will need to decide whether they want their benefits to be based on the legacy scheme or the reformed 2015 scheme, for the remedy period between 1 April 2015 and 1 April 2022.
The decision will need to be made when the member retires after this date. Members who retire before April 2022, will need to make their decision shortly after April 2022 and any changes to benefits taken will be backdated.
Each GP impacted will need to make a choice between their legacy scheme and the 2015 scheme, based on their own circumstances and needs.
Would there be any impact on GPs already drawing pensions pre-2015, or joining after April 2012?
GPs who took benefits before April 2015, will not be impacted by the changes, nor will those who joined the NHSPS after 1 April 2012.
In the latter case, members who joined after April 2012 would not have been eligible for protection no matter how close to retirement they were and are therefore excluded from the consultation. The exception are those who transferred in from another public sector scheme.
How did the 2015 reforms affect GPs specifically?
While the pension pot builds up slightly differently and the normal retirement ages are different, both the 1995 and 2008 sections of the legacy NHS Pension Scheme, were based on career average earnings.
Both sections put each GPs entire salary into a pot of earnings that was then uprated each year by 1.5%, plus the Consumer Price Index (CPI). The member would receive either 1.4% of the pot at the normal scheme retirement age if in the 1995 section, or 1.87% if in the 2008 section.
Other than how the pension accrued, members still received similar types of benefits as the final salary scheme. For example, the sections still offer ill health retirement, a spouse’s pension on death and an automatic lump sum if the member is in the 1995 section.
In the 2015 scheme, 1/54th of each GPs earnings are added to the pot each year, which is uprated by 1.5%, plus CPI. The member will get the pot as a pension at the normal scheme pension age.
Some benefits also changed between the legacy and reformed schemes. GPs in the 2015 scheme would not, for example, receive an automatic lump sum on retirement, which members of the 1995 section do.
Many GPs will also have an element of Officer service. The old scheme allowed some periods of Officer service to be treated as part of the career average benefits. However, when GPs moved from the legacy to the reformed scheme, this service was converted into an earnings credit, which is updated annually and classed as a benefit when the pension is drawn down. How this will be affected by the consultation is yet to be determined.
Where can I go for further guidance?
With areas as complex as this, it pays to obtain advice. A Specialist Financial Adviser from Wesleyan Financial Services can advise on how the nuances of this issue affect you now, plus into the future. You can book a no-obligation appointment at a time and date that fits best around your busy schedule.