McCloud remedy - Taxation and corrections unfunded schemes

Hello everyone and thank you for joining me for this second webinar on the McCloud remedy as it applies to unfunded public sector pension schemes. Now my name's Justin Corliss. I'm a technical marketing manager here at Royal London and specialize in public sector pensions. Now, if you had joined myself and Fiona Hanrahan for the first of these webinars, the McCloud remedy Adviser Overview Unfunded Schemes, you'll know that that first webinar gave the nuts and bolts of how the remedy works and highlighted some factors members may need to consider when making their McCloud choice at retirement. This one throws the spotlight on the taxation and other adjustments or corrections falling out of the remedy. Now throughout this presentation, I've assumed that you've got a sound knowledge and understanding of the McCloud remedy design, either from having watched the first webinar on the topic or from information that you've gathered elsewhere.

If you would like to access that first presentation that I've referred to a couple of times here, you can find it on our pension CPD hub or failing that you can speak to your usual Royal London Business Development Manager who can direct you to it.

Now, I have included a key terms appendix at the back of this pack as a bit of an aid memoir just to help with some of the terminology. Now, although all public sector pensions sit within the same regulatory framework, there are some key differences in how the remedy will work for the main unfunded public sector schemes compared to how it will work for the local government pension scheme, the LGPS as we normally call it. So we've got a separate webinar for the LGPS scheme, which you can watch if you choose. Now today, I also won't be considering the remedy for the judicial pension scheme, which is different again, but if you do have clients in that scheme and have any questions in relation to McCloud, then please let your usual business development manager know and they'll endeavor to help wherever possible.

So, as I said, today's session relates to the main unfunded schemes and by that I mean schemes for the NHS, for the teachers, the TPS, civil service, police, firefighters, and the armed forces as well. Now of course, for this to be CPDble we need to have some learning objectives. So, by the end of this session, you'll be able to describe the potential tax relief adjustments as a result of the McCloud remedy corrections, rather than adjustments, explain how the potential annual allowance corrections and how they will be dealt with as a result of the remedy and outline the potential lifetime allowance corrections as a result of the McCloud remedy. So, we want today's session to be of value to you. So as I've said, if you don't have a detailed understanding of the workings of the remedy itself, you may want to go back and watch one of the first webinars explaining the remedy design for all of this to make sense.

So in this webinar, I'll explain the contribution corrections that members of some schemes will face together with the associated relief corrections. We'll also explain what I know at the moment about annual and lifetime allowance corrections and I'll finish up with a handful of example scenarios so that you can see how the whole thing fits together. Okay, so let's get started then. In the last webinar we explained that individuals in scope of the McCloud remedy will be able to choose whether they want the pension benefits for the period 1st of April to the 31st of March 2022, to have built up in their legacy, final salary scheme or in their newer reformed career average revalued earnings, or CARE is the acronym we use, scheme. And your clients might be forgiven for thinking that giving them their preferred benefits for the period over which the discrimination occurred would be an end to all of this -  not so I'm afraid. Moving people between schemes on a voluntary or compulsory basis alters the benefits they receive.

That's kind of the whole point, but that in turn means that many members will face some adjustment or corrections. So buckle up while I drill down into some of the trickier aspects of this remedy. And these corrections are necessary because the government has stated that “…as far as possible, individuals should be put back into the position in which they would have been”, if the discrimination hadn’t happened. And you can see that statement there on the slide. And they're taking that standpoint in order to ensure that as far as possible, individuals are treated equally regardless of whether they've been subject to the unlawful age discrimination or not. So, this is the overarching principle sitting behind all the proposed measures that you're going to hear about in this next section. And the potential corrections fall into three sort of pretty broad categories. You're probably ahead of me as to what these are, particularly as they're written on the screen at the moment.

Firstly, for individuals in some schemes there could be some retrospective corrections needed to their employee contributions for the remedy period. And linked to that, there could be retrospective changes to the tax relief they receive on those contributions. And lastly, there could be some pension tax corrections for the annual and lifetime allowances. Okay, it's still the case that most public sector workers won't ever breach either of these, but for the minority where these could be an issue, the impact is going to depend on individual circumstances. But you know what? Firstly, let's look at the possibility of employee contribution changes. Now, retrospective contributions to employee contributions aren't going to impact everyone, okay? It's really only going to impact eligible members of those schemes where different contribution rates were payable between the legacy and the reform scheme over the remedy period. So, we're talking specifically about the police pension scheme and the firefighter's pension scheme, but for the avoidance of doubt, it doesn't impact eligible members in the NHS, teachers, civil service pension schemes where the contribution rates were the same regardless of whether the individual was a member of the legacy or the reform scheme, nor does it affect the armed forces because that's a non-contributory scheme.

And the local government pension scheme, as I've mentioned, had a different solution. So, they're out of scope for this as well. Now, I've said that changes to contribution rates don't affect teachers because they pay the same regardless of whether they're in the reformed or the legacy scheme for the remedy period. Now, there is one limited exception to this, and that applies to teachers who worked more than full-time hours while they were in the legacy scheme and therefore have so-called excess teacher service. Now, I'm not going to go into a lot of detail on this as it only impacts a very small subset of teachers. So, suffice to say, for those who are impacted, this excess teacher service could become pensionable under the LGPS once members are, or now that members have been shifted back to their legacy schemes. And because that's a different scheme, it will involve a change of contributions in respect of their excess teacher service. Please don't get hung up on this exception.

The LGPS and the teacher schemes have worked this through, and they have a solution that they have come up with for this. So by in large, you can think of the changes to contribution rates as pretty much an issue, which is only going to impact clients in the police and the firefighters schemes. But you know what? Although only two schemes are affected by this, the number of individuals in those schemes who are impacted is going to be pretty significant. So, I'm going to spend sort of five minutes or so outlining how these contribution adjustments are going to work. So, in line with there being two points at which members benefits could change, there's going to be a two stage approach to retrospectively correcting their contributions. And at either stage, the affected individual may be required to make a balancing payment, or on the other hand, they may be due a balancing refund from the scheme.

So, the first correction or stage one, as it's called in the guidance, occurs when eligible members who have been moved to the reform scheme are rolled back. Once again, that's the language used in the guidance there. So rolled back into their legacy scheme, which of course occurred in October 2023. 09:20 So it won't affect everyone, but for those that did a balance could be due or refunded at that point. The second correction stage, which is called imaginatively stage two in the consultation, will then occur when eligible members make their choice between legacy and reform scheme benefits at retirement. Now, if at that point they choose reform scheme benefits, the balance of contributions that would've been due under the reform scheme in the remedy period will be charged or refunded depending on the circumstances for the client. If on the other hand, they choose to keep their legacy scheme benefits for the remedy period at stage two, then no further retrospective contribution corrections will be necessary because nothing's changing at that point.

They'll already be in the legacy scheme for the remedy period. That happened already in October 2023. They went back into that. Now, before we go on to look at how these contribution corrections will impact tax relief, it's just worth flagging that I'll be talking later about what change contributions will mean for the calculation of income thresholds under the tapered annual allowance. So, I will be coming to that shortly if that's something that you are a little bit concerned about or worried that you're not going to hear about.

Now, as long as members earn a taxable income, they'll get tax relief on their pension contributions via the net pay method. So, contribution changes inevitably entail changes to tax relief. And because there are two points at which members' contributions could change, there are also two points at which there could be a corresponding correction for tax.

So, on the left of the flow chart you see there, if your client owes additional contributions as a result of changing schemes, they'll receive additional tax relief at their marginal rate in the year that they pay those extra contributions. Now, that won't always mean they get the right amount of tax relief, perhaps because they've changed tax bands, and I will be considering in just a second how the scheme will deal with members if they're in that position. On the right of the flow chart, if they've overpaid contributions, they'll receive a refund of the overpaid amount, but with an amount deducted to reflect the tax relief that they're no longer entitled to on those refunded contributions.

But what about those instances that I just mentioned on that last slide where your client's marginal rate of tax is different at the time their benefits change to the rate that would've applied if their contributions that have been paid in the relevant years? Well, starting on the left-hand side, again, let's look at situations where a member needs to make a balancing contribution payment, but they won't get sufficient tax relief perhaps because their tax rate is lower now to the one that applied in the years to which the extra contributions relate. Well, in this case, schemes have been given the power by an act of parliament to pay compensation equivalent to the difference, but members will almost certainly need to apply to their scheme to receive that compensation. Now moving to the right of our flow chart, let's look at the situation for former members and pensioner members who owe extra tax contributions.

Now, schemes will work out the tax relief deferred, and pensioner members should have had if they'd paid those contributions in the right tax years and will use its so-called section 18 power to require payment only of the net amount after tax relief the member would've had at the time. And as I explained just now, the scheme will provide members with details of how they've calculated the tax relief they think would have they would've been entitled to. So, it can be queried or challenged if necessary. And do you know what all these measures are, of course, in line with the government's overarching aim of putting members in the tax position that they would've been in had the discrimination not happened. And do remember before I move on that your clients won't necessarily owe extra contributions as I mentioned earlier, some will be due contribution refunds.

Now, one more thing before I just move on. So far in relation to the implications of change tax bands, I've explored the position where the individual would receive insufficient tax relief or no tax relief at all on any contribution corrections, but what I haven't considered yet is the situation where the member would receive a higher rate of tax relief on any additional contributions which fall due under correction than they would've received if they paid them in the year to which they relate. And you know what, logically, if you're on an upward career path, that could quite easily be the case. It's highly possible that some people could have moved from being a 20% taxpayer in the relevant years to being a 40% taxpayer now. So, we would receive tax relief at 40% on the extra contributions falling due. Now, I'll tell you, there doesn't appear to be any specific provisions for this scenario. So, my assumption is that these members will just derive a tax benefit from the remedy. No solution is perfect, but the important thing is that the steps have been taken to help ensure that no one will be in a worse position than they would've been had they chosen benefits all along.

Okay, in this next section, I'm going to endeavor to explain what it means for affected members annual and lifetime allowance limits and charges. But you know what, just to reiterate the point that I made at the beginning of this presentation, most public sector scheme members will not breach either of these limits, and the McCloud remedy doesn't change that. But for those who are impacted, there's unfortunately going to be some fallout which could affect your clients either negatively or positively. So firstly, the annual allowance. And look, I will apologize in advances. This section is inevitably quite techy and nuanced. I do try in these presentations to simplify things as much as I possibly can. Reality is some things are just complicated. So firstly, let's look on the left-hand side at stage one correction point. Now, members eligible for remedy have been rolled back into their legacy scheme.

So, the public Service Pension and judicial offices Act requires that after this rollback affected members are treated as if their benefits had always been built up in that legacy scheme. And this means that schemes will need to rework affected members' pension input for each of the remedy period years. And this could in turn mean that there's been an annual allowance charge over or underpayment for one or more of the remedy period years. But it's just worth acknowledging that rollback into the legacy scheme will likely result in a reduction to members' pension input in most cases. And that's because by in large, the legacy final salary schemes had a slower accrual rate than the reformed career average revalued earning schemes, which replaced them. Now, there are some notable exceptions to this general rule of thumb, which let me think of, well, such as the legacy schemes where individuals with sufficient service might enjoy double accrual.

That's a good example of one - police pension scheme 1987, and this is an example of that. So do give some thought to your client's circumstances before making any assumptions about the impact of rollback on their pension input. Now, moving onto the right-hand side of our flow chart here and stage two. When members choose between legacy and reform scheme benefits for the remedy period, there's obviously no annual allowance impact if the member chooses to keep those legacy scheme benefits because nothing's changed. In that case, they were already in the legacy scheme, they went into it in 2023, but if they choose reform scheme benefits at that point, then there will be an impact. But this time, all of the impact occurs in the tax year in which the member retires. And that's because this stage two adjustment will be structured as a payment of reform scheme benefits that's made under the legacy scheme.

Okay, let me clarify that just a little bit more. So, at stage one, members are legally rolled back into their legacy scheme for the Remedy period. But at stage two, if they choose to reform scheme benefits for that period, they are not legally put back into the reform scheme for it. Instead, they're given an amount of benefits equivalent to the reform scheme benefits for the remedy period but paid under the legacy scheme. So legally speaking, two different structures with two different pension tax impacts. Now, of course, the legal structure at stage two would mean that individuals could end up paying a higher annual allowance charge than they would've done had they been in their reform scheme for the remedy period all along. And that clearly wouldn't be fair. So, under the regulations, the annual allowance impact of making a reform scheme benefit selection will be ignored if it gives higher pension input.

Okay, so in other words, some impacted clients could still face an annual allowance charge in the year that they claim their benefits, but that can't be any bigger because they make an election to receive reform scheme benefits under the McCloud remedy. So, they might've already been going to have an annual allowance tax charge in the year that they took benefits, but they can't have it worsened or have one created just because of their McCloud decision. Now, for those of you with clients who are deferred members, it's also worth noting that an election to receive reform scheme benefits won't cause the deferred member carveout to fail pension input for clients who have been deferred for that scheme year will fall within the carveout and will still be nil.

So, on our previous slide I explained that rollback at stage one could result in an annual allowance charge under or overpayment. So, at this stage we've got four scenarios in total because the members overall or underpayment could be settled through scheme pays or in cash by the member. Now what I'm going to do is I'm going to look at scheme pays shortly, so I'm just going to part that for now. But for situations where we are looking at cash settlement, if the member has overpaid a tax charge, this can be reclaimed direct from HMRC if it falls within the statutory timeframe for the correction of taxes. This time limit is normally four years from the end of the tax year.

So, for example, if your client's position was rectified in the 2023-2024 tax year, which they all will have been the earliest remedy period for which any overpaid annual allowance could be reclaimed from HMRC is the 2019- 2020 tax year. If it falls outside of that timeframe, then the public sector pension and judicial officers act under that is there is considered a compensable loss. The member scheme will refund this money via a compensation process, which each scheme will have their own arrangements for. If there's been an annual allowance charge underpayment, which the member wants to settle in cash, there will be an HMRC process for this as well.

Okay, on the previous slide I did explain that rollback at stage one could result in an annual allowance charge over or underpayment and how that would be dealt with by the scheme and HMRC. Now let's look at stage two. At stage two when the member retires, there'll be no impact if they choose legacy scheme benefits because nothing's changing at that point. So, pension input will be calculated in the normal way. However, if the member chooses reform scheme benefits at stage two, there'll be another reworking of input in that year alone. And if that means that input is lower as a result of the election, then this lower figure will be used to calculate any liability to a tax charge. However, if the input figure is greater as a result of the election, then this is ignored, and the members should continue to use the lower legacy scheme input amount to calculate any annual allowance charge.

So for those lucky members whose pension input reduces as a result of a stage two election and who are owed an annual allowance charge refund, this will be refunded by the scheme, well refunded to the scheme in fact, by HMRC, if the charge was previously settled through scheme pays and would result in an upward adjustment to the member's benefits, if on the other hand the overpaid charge was previously settled in cash by the member themselves, we expect this to be refunded directly from HMRC and it is likely necessary to approach HMRC directly for clarity on that. Now, I just said that we'd talk about scheme pays and how that's been changed to accommodate the remedy because scheme pays forms a part of the whole raft of legislation, which collectively ensures that members know that they owe a charge in the first place and facilitates payment of it where the individual can't afford to pay the charge upfront.

So, what new information are members going to receive? What happens with their existing scheme pay selections and what options do they have to make new scheme pay selections? Well, I'm going to look at all of that in just a second. Okay, so firstly, let's look at what information impacted schemes are going to and have received in relation to their changed pension input. So, post rollback, new pension savings statements have been issued to members who either previously breached their annual allowance in the reform scheme or will do once they're rolled back into their legacy scheme. So, this could entail issuing members or could have entailed issuing members with new pension saving statements, updating an existing pension saving statement, or telling the member that a pension saving statement is no longer necessary. So, no one who was or becomes subject to an annual allowance charge should have been left in limbo.

And it's my understanding that these have all now been received by the members. The deadline for the scheme administrators to provide this information was the 6th of October 2024 for active and deferred members for pensioner and deceased members the deadline is six months after an election is made or six months after the end of the election period. Now to explain that just a little bit more fully, members who have already taken benefits or died prior to stage one will be offered a so-called immediate choice with the election period for this immediate choice 12 months from the date the legacy scheme issues the Remediable service statement or the RSS. Now, if the pensioner member or the survivor of the deceased member makes their choice prior to the expiration of that 12 month election, then the PSS needs to be issued within six months of the date the election was made.

When no election is made within the election period, these members will remain in the legacy scheme for the Remedy period. So that's the default. If you're familiar with the design of the remedy, you'll know that rollback took place in October 2023, and that was shortly before pension savings statements for the 2022-2023 tax year would normally have been due, but rollback will have impacted the opening values for the 2022-2023 scheme year. So, it wasn't practically possible to issue statements at that time due to the changing values. So, schemes had an extra year to get this information issued for the tax year 2022-2023. So, members now need to receive those or did need to receive those by the 6th of October, 2024. Once again, I believe this has already been issued out to those people or should have been by now. Now finally before we go on for completeness, it's worth mentioning that there are no special arrangements for the issue of pension saving statements at stage two when the member makes their choice between Legacy and Reform Scheme benefits at retirement. If they choose legacy scheme benefits, then nothing's changing anyway. And if they choose Reform Scheme benefits, as we know, this can't cause an increase in pension input, so no special arrangements being made there.

Now, many public sectors scheme members who are subject to an annual allowance tax charge choose to pay this via scheme pays either on a mandatory or voluntary basis. So, clients are likely to be concerned how previous scheme pays elections are impacted and if they can make new ones where their position has changed. So, first things first, rollback won't have any impact on the status of preexisting scheme pays elections, and the scheme must continue to honor these, and that's the case regardless of whether the original Scheme pays request was mandatory or made through a voluntary facility. But I think we all understand that changing input amounts could change the amount of any charge. The member would've requested that the scheme pays and members will remain liable for that new or amended charge. So, if the new pension input amount results in a lower charge, any preexisting scheme pays notice will be treated as the new lower amount.

The scheme will then request a refund from HMRC and will readjust the debit against the member's benefits to reflect the lower charge. If the member originally paid the annual allowance charge themselves, then they'll need to request the refund from HMRC. (28:59) If on the other hand, the new pension input amount results in a higher charge, the member may be able to use mandatory scheme pays. And just to be absolutely clear, this will be a mandatory scheme pays election even if the pension input amount for the scheme is under £40,000 or the members' annual allowance charge is less than £2000. So, there's going to be quite a lot of flexibility for members with increased pension input to use scheme pays. But as I've said before, the members of most schemes rollback are likely to result in a reduced pension input due to the slower accrual rate.

But as we said, there are particular schemes where that's not going to be the case. Now there are some specific deadlines for scheme pays elections made in these circumstances and you can see those in the third bullet point towards the bottom of the slide there. It's the 6th of July 2025 for members who were active or deferred at the point of rollback and the 6th of July 2027 for those who were pensioner or deceased members at that point. Now, if any of you have watched any of the previous iterations of the McCloud material that I've produced, you'll be aware that the previous changes made to the Finance Act 2004 so that affected members could access scheme pays didn't completely do the job. So, these regulations build on the previous changes so that everyone with a tax charge as a result of the remedy should be able to use mandatory scheme pays to settle it.

Now moving down to our bottom bullet there, due to the one year extension for scheme administrators to issue a pension saving statement for the 2022-2023 tax year to the 6th of October 2024, a similar extension had been made to the scheme pays notice deadline for that year. So, the new deadline for that 2022-2023 tax year is the 6th of July 2025. If the individual was active or deferred at the time of rollback occurred in their scheme or the 6th of July 2027, if they were a pensioner member or deceased at that point. There are no special arrangements for scheme pays at stage two because we know that at stage two the remedy can't result in a higher pension input than it would otherwise have been. Okay, now just finally before I move on, I want to consider how these changes will impact members who were either subject to the tapered annual allowance or are close to the relevant thresholds.

Now before looking at the detail of how the McCloud remedy might impact those subject to the taper, it might just be worth a quick reminder of how the relevant income limits are calculated. So, if I begin on the left-hand side with adjusted income, okay, I start with the member's total income subject to tax, and we use this figure before the pension scheme net pay contribution, and then I add in their employer contributions. And the key point here is that for DB schemes such as our public sector pension schemes, that employer contribution is calculated as pension input less the employee contribution. And so, it's easy to see how changed employee contribution or pension input caused by the Remedy has the potential to impact people's tapered annual allowance. There are of course a few other details in the calculation of adjusted income, but do you know what that will probably suffice as an explanation for our purposes today.

And so, let's just pick that, we'll just park that for now and move across to the right of the slide to look at threshold income. Okay, now once again, we begin with the members' total income subject to tax before their net pay contribution to the scheme, but this time we take off their employee contributions and their employer contributions are disregarded entirely. So again, it's easy to see how a change in the employee contribution rate could change the threshold income figure. So adjusted income can be impacted by changed accrual rate or by altered member contribution rates. Threshold income on the other hand, will only be impacted by changed member contribution rates, therefore it's only firefighters and the police pension scheme members who could see their threshold income change as a result of the remedy. However, anyone in scope of the remedy could see their adjusted income change if the benefits they build up change.

So, let's see what the regulations have got to say about that. Firstly, looking at the stack on the left of the slide, let's look at the potential impacts at stage one when rollback happened. Now as I've said, if a member has been rolled back, this will alter the pension they've built up for each of the remedy period years, and it could also retrospectively alter their employee contributions. So, clients subject to the table will need to recalculate their tapered annual allowance for each remedy period year in line with the change values. And remember here, as we've said previously, they can request their scheme sends information on the changed growth in benefits to help with this calculation if it hasn't been provided automatically. Now let's look at stage two when a member retires and makes their choice between legacy and reform scheme benefits. If at that point they choose legacy scheme benefits, nothing's changing.

So, no retrospective recalculation will be required. But moving to the very far right-hand side of the screen there, what happens if they choose reform scheme benefits? Well, the position isn't quite so clear here. My current understanding of this is that they'll need to calculate their tapered annual allowance based on the change growth in benefits, but not if their contributions change again. And if this applies, it's worth remembering what I said earlier, that if a new scheme benefit election causes more annual allowance to be used up at this point, that will be ignored. So, what that means in practice is that the value of their employer contribution, which is included in adjusted income, could potentially be lower and that it could in turn benefit the tapered annual allowance calculation. But that's not a hundred percent clear at the moment. Now finally, just before I get onto the excitement of the lifetime allowance, it does still have relevance.

It's just worth remembering that your clients will be able to use scheme pays in circumstances where rollback causes a new or increased tax charge. And that just might be particularly helpful to you if you are subject to or your client is subject to that tapered annual allowance. Alrighty, so let's just regroup with a very quick summary on what we've learned here, and I'll start with the annual allowance. Firstly, at stage one rollback, we know that client's pension built up for each of the applicable remedy years will be reworked by the scheme. And we know this could result in over or underpayment of an annual allowance charge for one or more of those years. And we know that scheme pays will accommodate new or increased tax charges or indeed except charge refunds as a result of remedy. Of course, we still need a little more detail around the process for individuals wanting to claim refunds of annual allowance charges that fall outside the statutory timeframe.

Probably best asking scheme directly or HMRC about that. Moving further around, we know that all of the impact of choosing reform scheme benefits at the point of retirement will fall in the year of retirement. And that the impact of choosing reform scheme benefits will be ignored if it results in higher buildup of a pension benefit than it would otherwise have been the case. Moving on again, if a client is subject to the taper or close to it, a rework of the numbers post rollback will be required using legacy scheme benefit buildup and contributions. Okay, next up in our suite of tax corrections, we need to look at the lifetime allowance. Now things are reasonably straightforward for clients who haven't previously claimed any benefits. Okay, so there's been no previous benefit crystallization event or BCE as I'll call it as I go through now, that's because they made their McCloud decision immediately prior to retirement as part of that process.

And so, their lifetime allowance calculation will be based on benefits that are actually put into payment after that decision has been made. Now and as the lifetime allowance tax charge was abolished from the 6th of April 2023 with a view to abolishing it, which they did abolish it all together from the 6th of April 2024. Even if that member does then exceed the old lifetime allowance, when they take benefits, it's not going to give rise to a lifetime allowance tax charge is it? So, for this group as we see it, all you perhaps need to think about is the limit on available tax-free cash or PCLS as this is currently fixed at £268,275. Unless of course that member has some form of lifetime allowance protection, giving them a higher PCLS eligibility. Now moving on to the right of the screen, things are a little more complex for those individuals who have had a previous scheme BCE before the remedy period comes into force.

Now the first thing to understand is that although these individuals are automatically rolled back into their legacy scheme or they were in October 2023, alongside the active and deferred members, no change is actually made to their benefits in payment at that point. Instead, as I think I mentioned earlier, the scheme gives them a so-called immediate choice. Now, the term immediate choice I think you'll agree is a slight misnomer as they'll have a year to make their decision from receipt of that remediable service statement, which is intended to help them make their decision. But schemes have 18 months from rollback to provide those remediable service statements. So, members in that position will potentially not be making their choice until well at earliest April 2025. Now, against that backdrop, the scheme pays deadlines that I talked about earlier of July 2027 for deceased and pensioner members begins to make a lot more sense, doesn't it?

Now, in the event that no choice is made, the scheme will default to providing legacy scheme benefits for the remedy period. So, any pensioner member or beneficiary needs to make a proactive choice if they wish to receive reform scheme benefits. And the outcome of all of this is that the scheme will know whether or not the members benefit crystallization event needs to be retrospectively rewritten. Now, just to clarify what I mean by that, the previous BCE isn't removed, it's just the amount which crystallizes under it could change depending on the member or the beneficiary's decision and circumstances. And of course, it goes without saying that this decision could also impact the level of members' benefits or death benefits payable to any beneficiary. And just for absolute clarity, these immediate choice members could potentially have their BCE retrospectively rewritten. And as this is a rewrite of the BCE that occurred when the lifetime allowance and the lifetime allowance tax charge was still in force, they could have an increase or decrease in their lifetime allowance tax charge even though the lifetime allowance tax charge has now been removed.

So clearly there are two scenarios we need to consider. The pension could either have been overpaid or underpaid. So, what I'm going to do is just take you on a short diversion from the lifetime allowance itself to explain the implications of these pension adjustments. Now, if the member or the beneficiary's choice means that the pension has been overpaid, then the individual scheme has the discretion decide whether or not to pursue repayment, although there is a presumption that monies owing will be recovered unless it's uneconomic to do so. As individual schemes have published their regulation amendments, there's more detail on how this discretion will be exercised, but it's not something that we're going to cover in this presentation. But reasonably we can imagine that they may not want to pursue payment and circumstances where it would cause genuine financial hardship for the members. I'd also expect individual scheme regulations to set out whether individuals will be able to make repayments in installments and so on.

But that's going to be a scheme by scheme decision. Of course, schemes also pay PCLS, don't they, tax free cash. So it may be that these amounts need to be adjusted to. However, if the member didn't max out their PCLS at the time they originally claimed, the lump sum they've received may still be within the permitted maximum and it may be possible for them to keep this. Now, as is the case with overpaid pensions, it's up to the scheme to decide whether to pursue repayment of the overpaid lump sum. If the amount of the overpaid lump sum is repaid in full, then this reduces the amount crystallized for the lifetime allowance purpose by a commensurate amount.

So now what happens if the pension has been retrospectively underpaid as a result of the pensioner or beneficiaries McCloud decision? Even prior to this McCloud remedy, there was already a process in place to pay arrears of scheme pensions and that same process applies here. And so, it's very clear that any backdated pension payments including top-up payments paid to beneficiaries will be authorized. And we also know that income tax will be deducted through PAYE and we know that the liability should occur in the year the member becomes entitled to that pension. For deceased members, the underpayment will also be taxed as pension income in the year in which the pension payment is made. However, in circumstances where the arrears are paid as a lump sum, this could mean that more taxes deducted than would otherwise be the case. For example, the lump sum pension arrears could push some members' taxable income into a higher tax bracket.

So, in order to prevent any financial detriment, the member will be able to reclaim the overpaid tax from HMRC. If the relevant information is provided, HMRC will spread the payments back over the relevant years. This is an established process which isn't necessarily unique to the McCloud remedy. Now, as I've already mentioned, a pensioner or a beneficiary's immediate choice could alter the amount of benefits which previously crystallized and that could in turn alter the amount of lifetime allowance charge previously paid, or indeed create a liability to a lifetime allowance charge that didn't exist previously. So, I've got sort of two scenarios. The revised lifetime allowance charge could exceed the original one or create a new one, or it could be less than the original lifetime allowance charge. So firstly, let's deal with situations where the lifetime allowance charge has been underpaid. So, I'm looking at the right hand side of the slide here.

Okay, so you'd expect the member and the scheme to have joint and several liability to pay the newer extra lifetime allowance charge. That's always the case. So normally the scheme will settle the charge in return for a commensurate reduction in the member's benefits. The scheme tells the member how much charge is due. It will also issue an amended BCE statement based on the revised increased pension and will continue to provide an annual BCE statement showing the revised amount of benefits crystallized under the scheme. Now finally, the member will need to tell any other schemes of which they're a member of this revised benefit crystallization event amount. Now moving over to the left of our slide, we now need to consider what happens if the lifetime allowance charge has been overpaid because the amount crystallized has reduced. So, the member is due a lifetime allowance charge refund.

So, in circumstances where the scheme has paid the charge, it's the scheme which needs to apply to HMRC for the refund of overpaid tax. HMRC will only pay the refund to the scheme. The scheme then informs the member of the revised charge. This could include informing the member that no charge is now due at all. The scheme provides a revised BCE statement and continues to provide that annually, and the members should inform their other schemes of the revised BCE amount. The scheme will adjust the members' benefits to reflect the amount of the refunded charge as well as the reduced benefit under the McCloud choice. Now, you don't have to have any concerns if the lifetime allowance charge was originally paid in a year, which is now out of scope for the statutory reassessment of tax. That's because it's a compensable loss under treasury direction. So, on application, the scheme will need to refund the member through an adjustment to their benefits even where they can't recover the money from HMRC.

Okay, now I want to look at the impacts of Remedy on the lifetime allowance protections which could be affected. So firstly, let's look at individual protection 2016 or IP 16 for short. We know that if your clients have valid IP 16 protection, they have a lifetime allowance, which is the lower of the value of their benefits on the 5th of April 2016 and £1.25 million. And we also know that their McCloud choice impacts benefits over the period 1st of April 2015 to the 31st of March, 2022. So, post rollback only the benefits that they built up over that single 2015-2016 tax year will fall within the IP 16 valuation and hence have the potential to change their lifetime allowance. So, what proposals did the government put in place to deal with that? Well, firstly, the government said that they won't need to rework their IP 16 valuation or as a result of rollback. So far so good, I suppose.

Now let's scroll forward to stage two and your client's choice of legacy or reform scheme benefits at retirement. If they choose legacy scheme benefits, then nothing changes. So, no impact on any IP 16 protection. If on the other hand they choose reform scheme benefits at retirement, then the benefits they receive in respect of that period change, but that change all occurs in the year they retire in. And while there won't be a lifetime allowance test at that point, at the point that they retire, retaining lifetime allowance protection can still be advantageous as it can protect the eligibility to have a higher amount of tax-free cash or PCLS than they would otherwise have been entitled to. So, there are some special arrangements in place to ensure that McCloud Remedy takes into account IP 16 protection. And that's achieved by allowing your clients to recalculate their IP 16 valuation based on the benefits that would've built up by the 5th of April 2016 if they'd had their preferred benefits for the remedy period all along. Now, what that means in practice is that if your client chooses Reform scheme benefits at retirement, they'll be able to recalculate their IP 16 valuation using the value as at the 5th of April 2016. This means they'll need to apply for a revised valuation from their scheme and apply to HMRC for a revised IP 16 protection certificate. HMRC will be providing the details of that process. That process. I'm not going to cover that today.

Next up, we've got fixed protection 16 or FP 16 for short. And again, as a little reminder, if your client had FP 16, they have a protected lifetime allowance of £1.25 million. But in order to retain that protection, they couldn't have growth in benefits or pension benefits. So couldn't have accrued, couldn't have contributed after the 5th of April 2016. And for most people, that effectively meant that they had to leave the scheme. Now following the March 2023 budget, which effectively abolished the lifetime allowance, the position is somewhat different, although there will no longer be a lifetime allowance test against a lifetime allowance that you can test against the FP 16 still has relevance. Fixed protection 16 protects a higher level of tax-free cash than your client might otherwise be entitled to when they come to retire. So, post the 6th of April 2023, it has been possible for holders of fixed protection 2016 to make further pension contributions without lose or accrue further benefits without losing fixed protection 2016.

But they keep the entitlement to any extra tax-free cash that FP 16 provides. Now, prior to the budget, the government had drafted some regulations specifically designed to ensure that you wouldn't lose the FP 16 protection as a result of choosing Reform scheme benefits at retirement. But it seems to me that those measures are now largely redundant because as I've said, anyone with FP 16 protection can now have benefit accrual provided they had that protection in place prior to the 15th of March 2023 - the date of the budget that abolished that lifetime allowance. So, there you go, that's a fairly nice clean solution if you have or if your clients have FP 16 protection.

Okay, so what I want to do is now I'll just quickly summarize what we've learned about the impact of Remedy on the lifetime allowance. The single most important thing to remember here is that this is really only going to impact pensioner members who've already claimed some or all of their public sector pension. And these people will be given a so-called immediate choice depending on what they choose. This could mean that they're due a benefit top up, or alternatively, it could mean that they've overpaid benefits. Any change in the benefits paid so far will retrospectively alter the amount of lifetime allowance that the client's used up. And this in turn could mean that at a lifetime allowance charge has been over or underpaid, if the lifetime allowance charge was originally paid by the scheme, the refund will also be claimed and processed by the scheme.

In cases where the lifetime allowance charge has been underpaid, the scheme will normally pay for it in return with a commensurate reduction in benefits. Looking now at the impact on lifetime allowance protections, the arrangements that have been put in place. So, you should be able to get new valuations or your clients should be based on their chosen benefits. These arrangements will also help to ensure that clients don't lose entitlement to a higher tax-free cash amount than they would otherwise have been the case. And just one final thought to leave you with here. In the event that one of your clients incurs a tax loss as a result of the remedy or the age discrimination, which you can't recover from the scheme or from HMRC, you can apply to the scheme for compensation for all of that. So, there is most of the bases are covered here, it would appear.

Okay, so now I'm going to move on and look at a couple of the other linked aspects, which could be of interest. Firstly, authorized payments. Now many of the payment types that I've talked about in this presentation would normally be unauthorized. So, in order not to create any detriment for members or unwanted tax liabilities for schemes, regulations have been put in place to ensure that in most situations, payments under the remedy will be authorized. So, no need for head scratching as to how these schemes are able to make some of these payments without blowing up tax liabilities.

Also, important that the client understands that interest will be added to payments to or from the member scheme. So, if the scheme owes the member money, they'll pay interest too. Now the rate which applies depends on the circumstances of the payment actually. So, if the scheme owes the member a contribution refund, it will pay interest on that refund at a rate of 8% broadly up until the time it implements the solution and notifies the member of their individual position.

After that interest will build up in line with the rate payable on the National Savings and Investments Direct Saver account up to the date of payment. But if the scheme owes the member a tax related compensation payment, so in relation to annual lifetime allowance, the rate of interest is different, and this time it will be Bank of England base rate minus 1% with a minimum rate set or a floor set of 0.5%. And just to complete this slide, if the member owes the scheme, then they'll pay interest in line with the National Savings and Investment direct saver rate.

So, for some of the period, the scheme would likely be paying interest at a higher rate on any refund it owes the member than they'd be paying on any extra contributions they owe. So next up, we are going to take a quick look at an aspect which no doubt will be close to many members' hearts, and that's going to be compensation.

The schemes have been given wide ranging powers to pay members' compensation in certain circumstances where they incur a tax loss as a result of the remedy. Now, as you've heard throughout the course of this presentation, in many situations it's expected that any tax members have overpaid will be refunded to them as part of the remedy process. But there are certain situations where this might not be the case. And if your client's in that position, then they'll be able to apply to their scheme for compensation. For those members who are paying or who have paid contributions to a personal pension scheme, If rollback means they've ended up overpaying an annual or lifetime allowance charge, which they can't recover from that scheme, their public sector pension scheme has the power to compensate them for that as well.

And similarly, if implementation of the Remedy results in a member losing lifetime allowance protection, then this scheme can compensate them for any additional lifetime allowance charge they have to pay, but they'll have to satisfy the scheme that it's only the remedy which has caused this loss and that applying for individual protection 2016 won't resolve the issue. And of course, steps have been taken to help ensure that the remedy doesn't result in a loss of lifetime allowance protection. But presumably these legal workarounds don't cover every eventuality. And so, there is this scheme compensation to fall back on if all else fails. And where the scheme does pay compensation, this could either be in the form of cash or by way of an adjustment to the member's benefits depending on the circumstances.

Now, I can't say definitively what else might be covered by this compensation as each case will be looked at by the member's scheme on a case by case basis. Further details on the process will be provided by the schemes if you want to look at their individual responses for it. But what we do know is that where cash compensation is due as a result of the discrimination, this will not be subject to income tax or capital gains tax. So that's something positive.

Now in our last section here, I'm going to introduce a few members in different scenarios so you can see what it means for each of them. I've color coded the slides in this section to aid understanding. So, the purple boxes would tell us what happened at stage one in 2023 when the schemes implemented the remedy and the teal colored boxes will tell us what happened at stage two, which for most people will be at their retirement.

So, meet John, he's a fully protected member, which means he benefited from the unlawful special deal, which his scheme is now trying to unpick. And John got that status because he was within 10 years of his legacy scheme, normal pension age on the 1st of April 2012. And under the original discriminatory arrangements, he was going to be allowed to stay in his legacy scheme indefinitely. But under the prospective part of the McCloud remedy, everyone has to build up benefits in the same scheme going forward. So as John was still in service on the 1st of April 2022, his scheme automatically moved him across to the reform scheme on that date. John isn't in the firefighters or the police scheme, so his member contributions don't change under the retrospective part of the remedy. As John was already in the legacy scheme throughout the Remedy period, there's no requirement to restore him to it.

So, because John doesn't retrospectively change schemes, there's no retrospective impact on his annual allowance or lifetime allowance. Fast forwarding to John's choice at retirement, the teal box, he elects to receive legacy scheme benefits for the remedy period, and that being the case, no further adjustments are required. He's already in the legacy scheme. Okay, moving on now. And looking at Sarah, who is a member of the police pension scheme or the PPS for short. Now, Sarah was too young to qualify for any protection, so was automatically moved into the reformed care scheme from the 1st of April 2015. Under the retrospective part of the McCloud remedy, Sarah had her scheme membership from the 1st of April 2015 to the 31st of March 2022 rolled back into her legacy scheme. And this happened of course in October 2023. In the second box because Sarah's in the police pension scheme, the PPS, where contribution rates vary between the legacy and reform scheme, this could result in a retrospective contribution adjustment.

And this adjustment could be in either direction, depending on whether she's moved back to the 1987 or the 2006 scheme as they have different contribution rates. So, Sarah could have paid more or less than she would have if she'd been in the legacy scheme for the remedy period all along. If Sarah has overpaid contributions, she'll receive a refund, less an amount equal to the tax relief on those overpaid contributions. If she's underpaid contributions, then she'll get tax relief on the additional balance of contributions at the point that they're paid, if that tax relief is received at a different rate than would've applied if she'd paid the right contributions. All along her scheme has the power to waive or reduce her liability to ensure that the tax position is appropriately corrected.

I don't actually know the details of the circumstances under which the police pension scheme will use this power, but whatever the position is, Sarah will not need to amend her position with HMRC as these are notional adjustments within the scheme. Now moving down to the third purple box, the different rates at which benefits build up in the legacy and reform scheme means that Sarah's pension input for each of the remedy year periods will alter, but for most people, this change will not alter their tax position. But if Sarah thinks that this impacts her, she can request updated pension input information from her scheme if it hasn't been provided automatically, and she'll then be able to work out if any tax charge is due or should be refunded based on those new values. Sarah isn't subject to the tapered annual allowance, but if she were she'd need to recalculate her threshold and adjusted income using her corrected rate of contributions for the remedy period and her corrected pension input. And being restored to the legacy scheme also means that the amount of benefits Sarah builds up over her lifetime alters, but as she hasn't taken benefits yet and the lifetime allowance tax charge has been abolished, she won't be subject to a lifetime allowance tax charge when she does take her benefits.

Moving down to the teal box at the bottom on her retirement, Sarah makes her stage two McLeod choice and elects to receive legacy scheme benefits for the remedy period. So, no further changes are required.

Next, we have Virat who was a taper protection member, and this means that he had more than 10, but fewer than 13 and a half or 14 years to his scheme's normal pension age as at the 1st of April 2012. I've said 13 and a half or 14 because this will depend on the specific scheme that Virat in. And because Virat had taper protection, he transitioned to the reform scheme at some point between 1st of April 2015 and March 2022 based on his date of birth. Now, because Virat is already in the reform scheme, there are no changes for him at the 1st of April 2022 under the prospective part of the remedy. Moving down to the second purple box, under the retrospective part of the Remedy, Virat was moved back to his legacy scheme for the appropriate portion of the Remedy period in October 2023. But he's not in the police or the firefighter scheme, so this doesn't result in any retrospective changes to his contributions.

Just as a reminder, it was only the police and firefighters who had different contribution rates for legacy and reform scheme, so it's only those people whose contributions may retrospectively be changed. But as with Sarah, moving between schemes does retrospectively alter the amount of benefits that Virat builds up over the relevant years of the Remedy period. So, Virat may need to pay a new or increased annual allowance charge for those years, but if this applies, it won't be any more than Virat would've paid if he'd been in the legacy scheme all along and he can use scheme pays to settle the charge. But tax adjustments don't just work in one direction, so it could be the case that Virat is due an annual allowance tax charge refund. Looking at our last purple box, changing schemes for the Remedy period will also impact the amount of benefits Virat builds up over his lifetime.

But of course, if he hasn't taken benefits yet, lifetime allowance has been abolished, so that won't be an issue. Moving down to the teal box at retirement, Virat makes his stage two choice and elects for reform scheme benefits. Now, as Virat was put back into the legacy scheme in 2023, choosing Reform scheme benefits will involve a second series of adjustments. In other words, another recalculation of his annual allowance position. And unlike the recalculation when Virat was restored to his legacy scheme, the impact of any additional pension input will all fall within the year he retires. But if that means he's used up more annual allowance than he would've done had he chosen legacy scheme benefits, then his pension input will be based on the legacy scheme benefits despite his choice. And lastly, choosing reform scheme benefits at stage two will also involve a recalculation of Virat's lifetime allowance position based on the benefits he's actually taking.

But as I just mentioned, as the lifetime allowance tax charge has been abolished before Virat takes any benefits, he won't incur any tax charge even if the value of his benefits does exceed £1,073,100. But as I've said before, although Virat's annual and lifetime allowance utilization will change as a result of changing schemes, the balance of probabilities is that he isn't impacted by pension tax charges and won't be after the remedy has been applied either.

Lastly here I have Shola who retired on the 31st of December 2019 when she was 60. Prior to Shola's retirement, she was a fully protected member and so she only has benefits under her legacy scheme. Shola will receive her Remediable service statement or her RSS for short by April 2025, and that statement will show the benefits available to her under both the legacy and the reform scheme to help her make her choice.

Shola has a whole year to make this decision, but having seen her adviser, she's clear what she wants in good time for that deadline. So, in February 2026, she chooses reform scheme benefits as this increases her ongoing pension. As a result of this choice, Shola's benefits are recalculated, and the scheme opens discussions with her as to the overpaid lump sum. With effect from March 2026, Shola’s scheme increases her pension income in line with her choice. They also pay a lump sum representing arrears of benefits plus interest minus overpaid PCLS and tax deducted under PAYE. As these arrears are paid as a lump sum, Shola may pay more tax than she would've done if she'd been receiving her preferred benefits all along. If she thinks she's overpaid tax, she can reclaim this. Now lastly, Shola’s scheme will rework her previous benefit crystallization events that happened in December 2019 when the lifetime allowance tax charge was still in operation to reflect the corrected benefits.

Now, the amount of scheme pension crystallizing for lifetime allowance purposes is based on the amount that was payable to Shola in the first 12 months. And in doing that, we find that Shola’s benefits have a value for lifetime allowance purposes of £976,000. In other words, they still fall below the lifetime allowance, so Shola has no tax charge to pay or to be refunded. Alrighty, I'm coming to the end of the presentation now. So, I just wanted to show this appendix where I've included some of the key terms that we've used in this webinar, and as I've said at the moment, I've assumed that if you're listening to this session, you've got a sound knowledge of the McCloud remedy. So hopefully you're all pretty familiar with these terms anyway, but if not, you can find them here at the back of the pack. There are two pages of these appendix slides, as you can see here. Let you have another looking at the learning outcomes as they must be at the end of the presentation. And from there, it really just leaves me to say thank you very much for your time. I hope that was useful. Please get in touch with your usual business development manager if you've got any questions that haven't been covered, and we will do our best to answer them where we possibly can.