Public sector savers need to sort LTA protections before April

Public sector savers need to sort LTA protections before April

Advisers have been told to make sure their clients with public sector pensions take action before April to keep their protection against lifetime allowance charges, as part of the McCloud remedy.

According to HM Revenue and Customs, for members to keep their fixed or enhanced protection from the lifetime allowance they must take action by April 1, 2022.

The government introduced LTA protection so savers could take the full value of the benefits they had built up before A-day in 2006, which is when the government moved to simplify the UK pension regimes by introducing lifetime and annual allowances as controls.

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But the McCloud remedy has created issues in this area, causing HMRC to warn people to take action now.

HMRC said those who originally lost their enhanced or fixed protection solely due to joining a reformed scheme (and not due to a subsequent action, such as benefit accrual) will not have lost their protection. 

But they will lose their protection if they accrue benefits under a reformed scheme from April 1, 2022.

The tax authority said to keep fixed or enhanced protection individuals who have not yet joined a reformed scheme will need to opt out of joining that scheme by April 1, 2022.

And those already in the reformed scheme will need to stop accruing benefits from April 1, 2022.

HMRC stated: “We’ll provide further guidance on what members need to do to reinstate their protection as a result of the 2023 McCloud remedy, at a later date.”

Steve Webb, partner at LCP, said: “Advisers who have clients with public sector pension rights and who have taken out protection against LTA charges need to check the latest guidance from HMRC. 

“Although the government has made promises that members should not lose out when the ‘fix’ to deal with the McCloud judgment is implemented, it may be simpler for all concerned to take action now to avoid a potential tax charge from arising”.

In Budget 2021, the government promised to fix any tax issues which may arise because of McCloud.

It said that individuals would be allowed to “protect their pension rights from lifetime allowance charges calculated on the higher of the two pension choices available to them”.

The McCloud court case relates to a dispute started in March 2015 when the defined benefit pension schemes for judges and firefighters were closed and 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 down in 2018, the Court of Appeal said the government discriminated against the two groups on the grounds of age, race and equal pay in relation to changes to their pensions.

The McCloud remedy is to be implemented in two stages, with the goal of stage one being to close legacy schemes to future accrual from March 31 next year, while ensuring all members remaining in service from April 2022 are moved to a reformed scheme, thereby removing the discriminatory treatment arising from the government’s 2015 public sector pension reforms.