Public pension schemes: Transition rules revised

08 March 2021

In April 2015, reforms of the public service pension schemes created controversy over the treatment of existing members and in 2018 there was a successful legal challenge on the grounds that the transitional protection offered to older members constituted direct age discrimination.

Following consultation, the Government has decided that the terms of legislation to remove this discrimination for the period 1 April 2015 – 31 March 2022 (‘the remedy period’).

How it will work

The new transitional rules will apply to all scheme members who were in service on or before 31 March 2012 and on or before 1 April 2015. All members of a reformed scheme between 1 April 2015 and 31 March 2022, will be automatically put back in their legacy scheme for that period. From 1 April 2022, all members of public sector schemes will be in the reformed version of their scheme for future service.

When a member comes to retirement after 1 April 2022, at the point of taking benefits, the member will be able to choose between the level of entitlement that would have arisen for their services in the remedy period under the new scheme rules or under their pre-2015 scheme rules. This was referred to as the ‘Deferred choice underpin (DCU)’ option in the Government’s recent consultation. 

What are the tax implications? 

As members will be put back into their original pension schemes for the period 2015 – 2022, the pension contributions for these seven tax years may need to be recalculated and their pension entitlements for those years could change. This will also affect the Annual Allowance tax liabilities that may have been paid. This could mean revising tax calculations for those years. 

Fortunately, the Government has confirmed that where this results in refunds of pension contributions that it will not be necessary for the member to adjust their tax calculations for each year: instead HMRC will make a tax adjustment to the refunded amount. Where a member is required to make additional contributions for the transition period (these will not need to be paid until 2023) the member will receive tax relief on them in that year. If this relief is at a lower rate than the individual would have received in the related tax year in the transition period, he or she can apply for compensation from the Government.

Putting members back into their legacy schemes for the transition period could clearly increase or reduce their pension entitlement. Where pension entitlement has changed for any of the seven years an adjusted Annual Allowance tax liability calculation will be required and the member will need to pay any additional tax due or claim a refund. Where tax was paid using the Scheme Pays option, the relevant credit for any refund will be added back to their pension scheme entitlement.  

When members exercise the DCU option at retirement, this could clearly increase their pension entitlement at that date. Where this would trigger an Annual Allowance tax liability, the Government has committed to ensuring that the member does not bear the cost of this if it relates solely to exercising the DCU option.

While this solution to the transitional period discrimination issue may be fair to members, it will come at the cost of much administrative work for members and their advisers. 

For help and advice on your tax position for your pension please contact our team.