The government has committed to provide tax-free compensation to members who choose the reformed scheme as opposed to legacy scheme benefits under the McCloud remedy, and will consult on the necessary legislation in the summer.
Following the chancellor’s spring statement, the Office for Budget Responsibility was able to update its estimation of the impacts of the McCloud remedy, first published in its October forecast.
At the time, it noted that the tax implications - which relate to changes in the accrual rates between legacy and reformed schemes, and that impact annual allowance charges - were “highly uncertain”.
Multiple departments including the Department of Health and Social Care, the Home Office, the Ministry of Justice and the Ministry of Defence launched consultations into the implementation of phase one of the McCloud remedy in December.
Phase one deals with moving all members from legacy into reformed schemes by April 1 2022, when the legacy schemes will be closed, while phase two will concern the choice members will have to make with respect to the transition period, which accounts for all service between April 1 2015 and March 31 2022.
Most public sector schemes have opted for a deferred choice underpin, under which members will be able to choose between the benefits accrued under both the legacy and the reformed schemes and pick the larger of the two.
However, this choice might mean the individual will receive additional benefits, and breach their AA or lifetime allowance.
“In October, we included a simple top-down judgement on a single aspect of the tax costing, namely the potential level of AA refunds due to those members that might be automatically rolled back into legacy schemes,” the OBR explained, adding that its estimated cost was £150mn per year in 2023-24 and 2024-25.
“We have now updated the costing to include the income tax payable when members opt for different benefits at retirement, using more granular modelling from HM Revenue and Customs." This has reduced the cost in 2023-24 to £10mn and changed the tax effect estimate to £40mn a year between 2024-25 and 2026-27, it added.
The OBR noted that the change reflects “an increase in income tax payable for members who receive higher benefits at retirement," as well as a small downward revision to AA refunds based on HMRC advice.
The public body also stressed the government has committed "to provide 'tax-free compensation' and that members 'will not bear the cost of [additional AA charges]' in the year of retirement if choosing reformed scheme rather than legacy scheme benefits", and revealed government plans for a consultation into tax legislation in the summer in advance of new regulations, which it expects to lay before parliament in September.
“For that reason, we have not adjusted the costing to incorporate tax that would otherwise be due in respect of either of these elements, though if that timetable is not met then we will revisit this issue as necessary in future forecasts,” the OBR explained.