Welcome to our GP Finance Newsletter. This edition covers a number of issues that impact on General Practice, including: National insurance rises Pension contributions Your FAQs…
On 4 February, the Government published its response to its consultation document that was published in July 2020. The consultation document was released in order to present options to overcome the issue of age discrimination in the reformed public sector pension schemes, which came into force on 1 April 2015.
The consultation document presented two options, which would allow members to choose which scheme they wanted to accrue their benefits in. The Government have decided that members will not have to make a decision until they draw their pension, this is called Deferred Choice Underpin (DCU).
What does this mean?
Quite a lot really and it certainly is not going to be a quick fix or easy solution, but it will allow for scheme members to be put in the position which is best for them.
The transition period of scheme members who were within a certain number of years from retirement runs from 1 April 2015 to 31 March 2022 – The Government now refers to this as the ‘remedy period’. Essentially this is the period of time which resulted in the age discrimination and is the period which must be addressed.
The consultation document states that by default, all affected pension scheme members will revert back to their legacy scheme(s) and will accrue benefits in the 7 year period as if they had remained in those schemes. This means there could be situations where a scheme member transferred to the reformed scheme on 1 April 15, has built benefits in that scheme since that date and will now revert back to their legacy scheme for that period, only then to choose to move back to the reformed scheme upon drawing down benefits. As you can see, this is going to require a great deal of admin by all parties in order to ensure members are presented with a clear summary of what their benefits look like.
Moving forward, anyone who is an active member of a public sector pension scheme will transfer to the reformed schemes on 1 April 2022.
For any members who have retired, deferred their membership or have already passed away, they will also be given a choice and will clearly be first on the list to be contacted. If any scheme members deferred their membership because they did not want to transition to the reformed schemes (at their relevant transition date), then in certain circumstances (if they can prove they would not have made that choice if they could have remained in their legacy scheme) pension administrators may allow them to retrospectively re-join the pension scheme. Of course, the unpaid pension contributions will need to be made.
The Government has set a date of 1 October 2023 to implement changes to legislation and ensure retrospective changes are made for the remedy period. Despite this being over two and a half years away, I think this will cause an extreme amount of pressure on the various agencies involved in the administration process.
How will this affect me?
Depending on age and individual circumstances, it will affect pension scheme members in different ways and it is by no means going to be easy to navigate. Pension scheme members may already be familiar with the Annual Allowance (AA) for tax purposes and may have even had their own issues in this regard, given that benefits will be reverting back (for now) to the legacy schemes. This will result in previously calculated and reported AA positions (for those who have already transferred to the reformed schemes) and charges will change and need to be corrected.
Given the way in which pension benefits are calculated in the reformed schemes, reverting back to the legacy schemes will likely result in a reduction to any AA charges that have previously been calculated. If this is the case, if the AA charge was paid up front by the scheme member then they will receive a refund for this. If they’d used the Scheme Pays option, the associated pension debit will be adjusted downwards accordingly. If for any reason there is an increase in AA charges, the member will be given the opportunity to utilise Scheme Pays at that time.
Upon drawing down on their benefits, if a scheme member is subject to an AA charge as a result of choosing the reformed scheme, then any resulting AA charge will be covered by the Government.
As well as AA charges, scheme members may be subject to adjustments to the contributions that they’ve paid to their pension scheme over the year. The pension contributions offer tax relief to scheme members and so if there is a situation where additional/fewer contributions are due, then an adjustment will need to be made. For those who have underpaid, the member will receive tax relief at their marginal rate during the year in which the contributions are made. For those who have overpaid, the refund due back to the member will be reduced by their marginal tax.
As you can see, there are many aspects to consider in the proposed changes, not least the financial impact when making a decision about which scheme to choose.
If additional benefits are available, considerations surrounding the tax impact and also whether additional contributions due will need to be made – it might be that a scheme member is offered a small amount of additional benefits, but in order to access these, additional contributions are required which may then wipe out the majority of the benefit. The hope is that the paperwork provided by pension scheme administrators will show this clearly to members to allow them to make the appropriate choice, as the plan is to present a comparison between benefits on the annual pension statements.
Given the complexities, we will be putting together a factsheet to send around to our clients and contacts, that will explain more of the detail.
As always, if you have any questions or would like any support, please feel free to contact me or your normal PKF Francis Clark contact.