Pensions are among the most complicated tax wrappers we have in the UK. There are many different types of pensions, and each have their own unique criteria. Even I as a professional, with over 15 years in financial planning including as a senior adjudicator, holding advanced pension qualifications including Chartered status must remind myself on the intricacies of certain types of pensions that I don’t come across every day. However, I try to take comfort in that I know what questions to ask and what must be considered when unfamiliar legacy plans come across my desk.
The first thing you need to know, and this applies to those who aren’t judges too, if you have an occupational pension plan, your pension payment is taxed under PAYE before you receive it. This means you will be liable to UK tax even if you become non-UK resident in retirement. This contrasts with a personal pension or a Self-Invested Personal Pension (SIPP) which will suffer local tax rates. Therefore, should you become a resident in a lower tax jurisdiction in retirement, you could access your personal pension or SIPP with little or no tax consequences.
The second thing I’d like you to know is when we use the word “pension”, it can have several meanings, for instance, the value of the underlying fund or the actual income you receive or are due to receive from the pension provider. In this article, when I use the word “pension” I’m referring to pension income or merely the all encompassing tax wrapper.
This all stems from the long-foregone coalition government who in June 2010 had established an Independent Public Service Pensions Commission to look at “the long-term affordability of public sector pensions, while protecting accrued rights”. In March 2011 the Commission recommended the following:
- replacing the existing pensions which were linked to the members final salary to one that was linked to career average earnings.
- increasing the pension commencement age to align with the state pension age for all schemes except the armed forces, police and fire services which would have a pension age of 60.
The Government accepted these reforms, and they were legislated into the Public Service Pensions Act 2013 which became a framework for new schemes introduced from 2015 (2014 for local government). The idea being the various public sector schemes would go on to attempt to manifest this framework in their new pension schemes for their employees to ensure the long-term sustainability of the traditionally lucrative public service pensions.
However, the manifestation of the framework on the new judges’ pension would go onto have severe ramifications across ALL public sector schemes. So, what happened?
On 1st April 2015, a New Judicial Pension Scheme (NJPS) was introduced, membership of which was less attractive than the original Judicial Pension Scheme (JPS). To reduce the negative impact of the NJPS on those closer to retirement there were transitional provisions. Those provisions allowed judges to remain members of the JPS by reference to their date of birth if it was better for them.
- Existing members of the JPS who were born on or before 1st April 1957 would have full protection, could continue in the JPS. Ultimately, the potential benefits under the final salary JPS would be compared with the career average scheme and whichever was higher would be paid. This was the original “statutory underpin” protecting the older members.
- Existing members of the JPS who were born between 2nd April 1957 and 1st September 1960 are entitled to time-limited protection.
- Those born after 1st September 1960 weren’t entitled to any protection and were excluded from active membership of the JPS.
- The original JPS aka Judicial Pension Scheme 1993 aka JUPRA as it was established under the Judicial Pensions and Retirement Act 1993 was an unregistered final salary pension scheme. This meant that although the pension contributions didn’t attract tax relief, contributions were not limited to the annual allowance or lifetime allowance limits. This meant judges could have a separate registered pension scheme that they could also fund without penalty. Whether they took this opportunity is another matter. Other features included (not exhaustive):
- An accrual rate of 2.5% (1/40th) of pensionable earnings.
- Normal Pension Age of 65 years.
- Automatic lump sum on retirement at rate of 2.25 times the annual pension
- The NJPS was a registered pension scheme, this meant pension contributions would be limited by the annual allowance and the lifetime allowance. This scheme was based on a career average basis rather than the final salary basis. Other features included (not exhaustive):
- An accrual rate of 2.32% (1/43.1th) of pensionable earnings.
- Normal Pension Age linked to state pension age.
- Optional tax-free lump sum based on a commutation rate of 12:1. This meant for every £12 of cash, £1 of pension would need to be given up.
The McCloud judgement
Some of your colleagues, those who had limited, or no transitional protections weren’t happy with the transitional provisions. They brought claims to the employment tribunal (i) alleging direct discrimination on grounds of age (ii) for equal pay on the basis that the transitional provisions disproportionately adversely affected women; and (iii) alleged indirect sex and race discrimination. The government didn’t dispute the provisions discriminated based on age but argued that it was justified as a proportionate means of achieving their aims.
There were similar claims made in relation to the firefighter’s pension scheme but both employment tribunal cases led to the McCloud judgement in the Court of Appeal, and following 5 hearing dates, in December 2018, the Court of Appeal stated that the ‘transitional protection’ offered to some members as part of the reforms amounted to “unlawful discrimination”. Then in July 2019 the government accepted that difference in treatment would be remedied across all public service pension schemes regardless of whether individuals made a claim.
In July 2020 the government launched a consultation proposal to build the remedial action in relation to the McCloud judgement. The government response, now known as the McCloud remedy, was issued in February 2021. Here are the key points (not exhaustive):
- Eligible members which now included qualifying younger members would now be given a legacy or reformed pension scheme benefits in respect of their service during the period between 1st April 2015 (1st April 2014 for local government) and 31st March 2022 (the remedy period).
- The choice would be made at retirement, or just before the benefits come into payment.
- In the meantime, members will be deemed to have accrued benefits in their legacy schemes for the remedy period. From April 2022 all active members would be transferred to the reformed schemes for future service.
Ultimately, it would be down to each public service pension scheme provider to determine how to implement the McCloud remedy when their own schemes faced a potential age discrimination issue.
McCloud remedy and the judicial pension
To qualify for the remedy members would need to satisfy the following 5 conditions:
- They have service that takes place in the period beginning with 1 April 2015 and 31 March 2022 – this is known as the remedy period;
- The service is pensionable under a judicial scheme;
- The member was in a pensionable judicial office or a pensionable non-judicial public office on or before 31 March 2012;
- There is no disqualifying gap in service (a period of five years or more);
- The member was aged under 55 on 1 April 2012.
If you’ve been the affected, the Ministry of Justice (MoJ) will contact you first with a Preliminary Information Statement (PIS) to confirm the data they hold about your pension service, which you need to respond to within 2 months. You’d then be sent an Information Statement with an options exercise with a comparison of the estimated benefits you could’ve received under the various options during the remedy period. You need to respond to this within 3 months.
The Judicial Pension Scheme (JPS) 2022
From 1 April 2022, all members eligible for a judicial pension joined the Judicial Pension Scheme 2022 (JPS 2022), unless they opted out. JPS 2022 is an unregistered Career Average Revalued Earnings (CARE) scheme. The pension being the average of your pensionable earnings throughout your membership of the scheme. Other features include:
- Member contribution rate of 4.26% of pensionable earnings
- Accrual rate of 2.5% (1/40th)
- No cap on the number of service years
- Normal Pension Age linked to the State Pension Age
Why this matters for you?
As judges you’re likely to be a higher rate or a top rate taxpayer. Over the years you are also likely to have built wealth that could now be liable to inheritance tax (IHT).
You should be thinking about intergenerational wealth transfer and asset preservation. This is where you can take advantage of registered pension schemes whilst still being a member of the JPS 2022.
Therefore, any surplus income can be saved into a registered personal pension or a SIPP. This will give you income tax relief at 40% or 45%, which is a highly tax-efficient way to build up additional capital. For example, £1,000 per month in a registered pension would only cost a higher rate taxpayer £600 and a top rate taxpayer £550. You could invest £60,000 per year into a registered pension and that would only cost you £33,000 as a top rate taxpayer.
If you’ve been a member of a registered pension from previous years, then you could potentially also benefit from carry forward. This is when you have not utilised the full annual allowance from the previous 3 years, and in the current tax year you’re able to “carry forward” those unused allowances to make a larger contribution into the registered pension scheme.
The magic of the registered pension is that it can be inherited by your beneficiaries tax-free should you die before age 75 or be only subject to your beneficiaries’ marginal rates of income tax if you die when you’re over 75. Crucially, registered pension schemes are not subject to the 40% IHT.
What could potentially be even better, especially where you have non-taxpaying beneficiaries such as grandchildren, is passing your registered pension into a Pension Death Benefit Trust (PDBT). This should be undertaken with a carefully worded contingent nomination. A decision to be confirmed on death.
Now, although the trust would suffer an immediate 45% tax on entry, this tax can be reclaimed when it’s advanced to a lower tax paying or a non-tax paying beneficiary. This does mean only 55% of the pension trust fund can be invested.
The PDBT allows for protection against third party threats your beneficiaries could face such as remarriage of the surviving spouse, divorce settlement claims, care costs, creditor claims and generational inheritance tax.
Intergenerational Wealth Management requires multiple disciplines and it’s crucial it is done correctly. You can download our e-book – Winning at life: Welcome your future, maintain your assets, secure your capital, safeguard your family and plan for your future legacy via the following link: https://adlestateplanning.co.uk/winning-at-life/
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Mohammad Uz-Zaman is a chartered private client wealth manager who holds accreditations across regulated financial advice and estate planning. He is also an associate member of the Society of Trusts and Estate Practitioners (STEP). He works closely with financial advisers, general practice solicitors, accountants and investment managers from several major practices. Should you be interested in exploring a B2B relationship please email Mohammad Uz-Zaman directly at email@example.com.