Impact of McCloud judgement

The McCloud judgement has several implications for members of the NHS Pension Scheme. Those members who already have lifetime allowance protection may need to take urgent action before 31 March 2022.

The lifetime allowance (LTA) is the total amount that an individual can build up in all their pensions, without incurring a tax charge. The pension LTA is currently £1,073,100 and this figure will be frozen to at least 2026. The LTA was introduced in 2006 at £1.5m, and although this limit was originally increased, in recent years it has been progressively reduced.

The capital value of the NHS pension is calculated as twenty times the annual pension plus, where applicable, the lump sum. If this figure exceeds the lifetime allowance, the pension will be liable to an LTA charge.

Where the capital value of your pension benefits exceeds the LTA, the tax charge is calculated as 25% of the excess, if taken as pension, or 55% if the excess is taken as a lump sum. The charge is deducted by NHS Pensions, reducing the pension benefits you receive.

There are a number of LTA protections, which were made available firstly when the LTA was introduced, and subsequently when the LTA was reduced.

Enhanced protection was introduced at 6 April 2006, for individuals who either had, or could have benefits in excess of £1.5m. It enables existing pensions to grow within set limits (known as defined benefit accrual), without incurring a lifetime allowance tax charge. Provided that you didn’t transfer into a new pension scheme, you can still make contributions to your existing scheme. This is a valuable LTA protection, as it is more generous than the current LTA or the other LTA protections.

Further LTA protections were introduced in 2012, 2014 and 2016. Individuals are still able to apply for Individual Protection 2016, provided that the capital value of their pension benefits exceeded £1m at 5 April 2016. This fixed the individual’s LTA at the lower of the capital value of the pension or £1.25m. Individuals can still make pension contributions. Individual Protection 2014 is similar, with the LTA limits between £1.25 and £1.5m, however, the protection is closed to further applicants.

As a result of the McCloud judgement on 31 March 2022, the 1995/2008 Pension Schemes will close, and those individuals who were protected due to their age and who have remained in these schemes will automatically be transferred into the 2015 Pension Scheme.

This can have serious repercussions for those members with enhanced protection. As the 2015 Scheme is classed as a separate pension scheme, enhanced protection will be lost.

Where individuals have already transferred to the 2015 Scheme, and lost their enhanced protection, they have the option at retirement of effectively going back into their original (legacy) Scheme for the period from 1 April 2015 to 31 March 2022. It is assumed that if this occurred, enhanced protection would be reinstated, as the individual would have remained in the legacy Scheme.

For enhanced protection to hold at retirement, you would then need to leave the NHS Pension Scheme prior to 31 March 2022, as you would otherwise then transfer into the 2015 Scheme, which would trigger the loss of protection.

Therefore, those members of the NHS 1995 Pension Scheme need to take urgent action as soon as possible, to ensure that they do not incur LTA charges which may be avoided or mitigated.

If you are not sure if you have enhanced protection, this can be checked with HMRC. You will need a government gateway user ID to do this.

Individuals have a range of options available, including opting out of the NHS Pension Scheme before 1 April 2022. However, before taking any action, it’s worth taking independent financial advice.

If you’re unsure whether this affects you, in the first instance, please get in touch with your usual Larking Gowen contact. You can find contact details on the Our People section of the Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Melanie Garrett