Budget 2021: Public sector pension members get McCloud tax exemption

Budget 2021: Public sector pension members get McCloud tax exemption

HM Revenue & Customs has announced on Wednesday a series of measures to ensure public sector scheme members will not have to pay extra tax if they receive an uplift in their benefits due to the McCloud remedy.

The new measures, announced in the Autumn Budget 2021, specify that there will be an tax charge exemption “on the compensation an individual may receive if, following the remedy, they are owed money”.

As reported by Pensions Expert in February, the government proposed solution for the discrimination case is that members are offered either an immediate choice or a deferred choice underpin, as to whether they remain in their current scheme or move back to the legacy scheme as it was pre-2015.

Due to this, HMRC has revealed that individuals will be allowed to “protect their pension rights from lifetime allowance charges calculated on the higher of the two pension choices available to them.”

Members will also have an additional annual allowance available to them, so that an individual will not pay an extra charge than they would have done “if they had accrued their chosen benefits in the relevant tax years,” it noted.

An on the cases where a scheme has paid lifetime allowance or annual allowance charges on behalf of the individual, but that accrual is now under a different scheme, the payment will be deemed to have been paid by the latter.

Finally, the new measures will endure that payments of pensions and lump sums that would have been authorised payments had they been made at the relevant time, are treated as meeting the conditions to be authorised.

Due to its retrospective nature, the measures will need secondary legislation, which will be provided under the Public Service Pensions and Judicial Offices Bill, HMRC stated.

The measures will apply to all members affected by the 2015 age discrimination in public service pension schemes and will come into effect from April 6 2022.

The McCloud court case relates to a dispute started in March 2015, when the DB pension schemes for judges and firefighters were closed, and the members transferred into a replacement scheme.

Transitional provisions were put in place, which allowed older judges and firefighters to remain members of the old schemes, either until retirement or until the end of a period of tapered protection, dependent on their age.

But in a ruling handed out in December 2018, the Court of Appeal said that the government discriminated against the two groups on the grounds of age, race and equal pay in relation to changes to their pensions.

In January 2019, the government confirmed the ruling will apply to all public sector schemes, with an initial estimate that remedying the discrimination will add about £4bn a year in liabilities across the board.