What the McCloud judgment means for your NHS pension

The NHS Pension Scheme is one of the longest running defined benefit pension schemes (also known as a financial salary scheme) in the country, and it’s gone through many changes and iterations over the years. This can make understanding the details of the scheme incredibly complex for members who have seen their pension benefits change throughout their years of service.

Each version of the scheme has a different set of rules attached to it, for example the 1995 section of the scheme has a normal retirement age of 60, rising to 65 in the 2008 scheme and pegged to the state pension age for the 2015 scheme, which is the latest version of the NHS pension.

The 1995 scheme also entitles a member to three times their annual pension as a tax-free lump sum. This is not the case in later iterations of the scheme, as members have to commute some of their income for tax free cash entitlement.

If you’re a member of the NHS pension scheme, you should receive an updated reward statement each year which provides a breakdown of the pension benefits accrued to date. For many members their benefit will be made up of at least two sections of the scheme which will be reflected on the statement.

Following the McCloud Judgment and the subsequent implementation of the remedy, it is more important than ever for pension members to understand their benefits and the options available to them so that they can take control of their financial future.

The McCloud judgment is essentially an age discrimination court case which found that younger members of a final salary pension scheme had been subject to age discrimination when changes were made to the calculation of their benefits. This judgment and subsequent remedy has meant many public sector schemes have had to review similar changes they have made, including the NHS pension scheme.

In 2015, the NHS introduced the 2015 section of the NHS pension scheme. This section of the scheme is based on career average revalued earnings (CARE), rather than final salary.

Members were moved from one scheme to another based upon their dates of birth. Younger members were automatically moved into the new scheme, whereas those closer to retirement were able to remain within the 1995 (legacy) version of the scheme. There were also a group of members that were transitioned in between 2015 and 2022.

In simple terms, the purpose of this was to reduce the overall running costs of the NHS pension scheme. The change was likely to reduce the pension benefits available to many members, as the calculation of benefits would be based on earnings over the entire career, rather than the final salary which would be calculated on earnings at a time when the member was at their most senior and the peak of their earning power.

While the career average model still provides guaranteed income based on annual earnings and continues to be an extremely valuable scheme the McCloud judgment found that this action discriminated against younger members. The case was brought to the court of appeal, and this was judged to be age discrimination.

Following the judgment, the McCloud remedy is designed to reverse the age discrimination that occurred in each scheme. The remedy will impact two main areas for members, their accrued benefit position and their annual allowance tax position.

The first stage of this process was ‘rollback’ where the service that accrued in the 2015 scheme by a younger member is rolled back into the 1995/2008 legacy scheme. In many cases, members will have seven years of service accrued between 2015 to 2022. This period of service will be moved back into the 1995/2008 pension scheme.

This means their service in the legacy scheme will increase and the reformed scheme will decrease.

This process has already happened, and members should now have updated reward statements showing their revised pension benefits.

Although the remedy period service has already been rolled back into the legacy scheme, at retirement, affected members will be allowed to choose whether they prefer their benefits to be calculated under the legacy final salary scheme or the CARE scheme rules for the years 2015 to 2022. There will also be an ‘immediate choice’ for those at retirement and those already in receipt of pension benefits.

The McCloud judgment will affect NHS pension members benefits and annual allowance tax calculations between the years of 2015 and 2022. There are a number of components of the McCloud remedy for NHS pension members to be aware of.

The potential impacts are wide reaching, and the below list is designed as a high-level overview and is not exhaustive. Some details, such as contingent decisions, have been purposefully excluded for clarity, so you should seek professional advice if you need further information.

Rollback of service

Members affected by the judgment will have their service from 2015 to 2022 reassigned to the final salary scheme, known as the rollback. This adjustment will increase final salary benefits and decrease career average benefits, creating a series of decisions for members to make at retirement. 

Annual allowance and tax implications

As members are rolled back into their legacy schemes, the annual allowance inputs for each of the affected years will need to be recalculated as though the member had always been a member of that scheme.

Remediable Pension Service Statements (RPSS) are currently being issued to members showing their revised pension input position.  Members will receive detailed statements showing recalculated benefits and annual allowance figures positions. When this statement is received, members will have three months to reassess their position. These pension statements will contain a large amount of detail and are crucial to reassessing the pension tax position moving forward.

Members who have previously overpaid annual allowance tax could be entitled to a refund for the overpayments, but members who have underpaid may have to make additional payments or use a scheme pay option.

It is important to note that the statements will not consider an individual's overall income position. Therefore, for high earners (potentially working private as well as for the NHS) who may be subject to a tapered annual allowance, the statement may not accurately reflect their annual allowance position.

For some members, they be required to to revisit historical tax returns, which could be a significant undertaking without professional assistance. The good news is that there is a compensation scheme should professional support be required from an accountant in relation to the McCloud Judgment. The NHS cost back claim scheme can provide up to £1,000, but you should confirm this with your accountant before proceeding.

Once you’ve received your remediable pension savings statement, there may be some actions you need to take.

Review your statement

Once you’ve received your pension savings statement, review it carefully to ensure you understand the recalculated figures for both schemes. If you’re finding it difficult, you can seek professional advice to help you work through it.

Assess your tax position

Use HMRC’s online system to determine whether you need to adjust past tax payments or make additional ones. The first stage of the process is a triage to establish if further action is required. If it is, a form of up to 230 pages may need to be completed. Again, a professional can help here if you’re not confident in competing the online tool yourself.

Seek professional advice

Once you’ve competed the online questionnaire, there may be an annual allowance tax charge to pay. There are a number of different ways you can pay this, including by using other pension assets.

A financial planner can provide clarity on your options, particularly for high earners or those nearing retirement.

Evelyn Partners works with trusted accountants to assist with detailed tax reviews, and our financial planners specialise in tailoring retirement strategies to individual circumstances.

While all affected members should review their position, advice could be even more important for people who are:

Approaching retirement — Members over the age of 50 may benefit most from a comprehensive review to ensure that they understand their McCloud remedy position and are assured that their pension is aligned with their retirement planning goals. Moving forward, members may want to understand how to boost their retirement position and put a plan in place to achieve their financial goals. The introduction of partial retirement now offers another flexible way for members to access their pension benefits.

High earners/Private practice —If you’ve paid annual allowance tax charges in the past or been subject to pension annual allowance tapering, there are likely to be significant recalculations needed for previous tax years. You should seek professional advice to ensure these recalculations are done accurately and also consider how to settle these charges as there are different options available.

Complex financial situations —Those with additional private pensions or estate planning goals can benefit from advice to ensure the decisions made on the McCloud remedy work in conjunction with the rest of their strategy. While the pension scheme is the same for all members, everyone’s individual circumstances are different. It is important to understand your individual position before making any decisions relating to such a valuable pension scheme.

At Evelyn Partners, we recognise that the NHS Pension Scheme is a critical piece of your retirement plan, but it’s just one part of the puzzle. Our approach ensures all aspects of your finances, from tax planning to estate management, work together to help you achieve your short, medium and long term goals.

Whether it’s understanding the McCloud judgment or navigating your broader retirement planning needs, our financial planners are here to help. You can book a complimentary initial consultation online or call 020 7189 2400.