Paul Gordon, medical specialist financial planner at atomos, sees GPs paying potentially significant interest on Scheme Pays used for annual allowance charges.
The McCloud Remedy corrected a historic injustice for younger doctors. It restored their rights to the same pension terms as older doctors, finding that the 2015 transfer into a new scheme was unlawful under age discrimination rules. However, it exposed a second injustice for doctors who had used Scheme Pays to clear tax liabilities associated with annual allowances. This remains unresolved.
The history will be familiar to many doctors. In 2015, public sector pensions including the NHS Pension were reformed, primarily involving a move to career average schemes (rather than final salary). The reforms allowed older people to remain in their existing schemes while forcing younger public sector workers into an alternative option – usually one that involved retiring far later. The McCloud Judgment was a Court of Appeal ruling in 2018 that said these reforms discriminated against younger members with more than ten years until their normal retirement age in April 2012 by allowing older members to remain in the original, arguably more generous, schemes.
The McCloud Remedy sought to ensure that all active members are in the reformed career average scheme, providing equal treatment for all. While this seems like an equable settlement, the rollback created some complexities. As members were put back into their legacy schemes, it required a significant recalculation of the annual allowances for the years from 1 April 2015 to 31 March 2022 when they were in the old scheme. These needed to be recalculated as though the member had always been a member of that scheme. Members who saw their growth increase from 2019/2020 onwards may well be left with a liability and would need to make additional payments or use a Scheme Pay option, where the pension scheme would step in, pay the tax and recoup it, with interest, from the final pension pot.
A neat solution?
At the time, this appeared a neat, and possibly the only, solution to the problem. Younger doctors may have had mortgages, tax charges, family commitments and faced the prospect of paying tax on benefits they hadn’t received. However, many doctors would likely have made a different choice in light of the McCloud Remedy, and we believe they should not now be penalised for a choice made in response to a wholly different set of information available to them at the time.
Doctors may now find themselves with 30+ years where they will be accruing interest on a loan against their pension pot. This is 30 years of unknown inflation-linked interest added to a charge on benefits now due from state retirement age. This may impact their retirement planning. The government lost its case in the Court of Appeal on the grounds of age discrimination. We believe that could reasonably be argued here too.
Many of these tax charges were triggered by having two sets of pension growth. One that they volunteered to be in when they started out, and one they were forcibly moved into as part of the change in scheme. In short, they are paying additional interest/taxes because they were forcibly moved from pension scheme A to B. Then, after the Court of Appeal ruling on age discrimination, they were moved back from scheme B to A. As it stands, doctors have no option to unwind historic scheme pays. They can be reduced but not rescinded.
What is the scale of the problem? If our client base is anything to go by, it is significant. Perhaps even more importantly, the burden is highest on some of the most productive members of the NHS – those taking on managerial roles, clinical or medical director roles, or simply working within the NHS and receiving private practice income.
Frustration
We have a number of clients in their 40s and early on in their NHS careers, who didn’t want to retire at 68 in line with the 2015 pension arrangements. They decided to opt out of the pension and overpay using the savings to overpay mortgages, assist with education costs, or just cover some of the increased costs of living.
During the seven-year McCloud Period, they incurred annual allowance charges and didn’t have sufficient capital to pay the charges. They opted to use Scheme Pays and now have a 20-plus-year liability against their pensions. Our view is that this creates an incentive problem with many choosing to work fewer NHS programmed activities or decline pensionable pay increases over concerns around potential tax charges.
The delays in issuing Remedial Pension Savings Statements (and corrections) is another frustrating aspect resulting from the McCloud Judgement. In a number of cases, they haven’t been received, or they have received at least two as the first was incorrect.
We are trying to get NHS Pensions to engage on the issue and reconsider its stance on unwinding these Scheme Pays arrangements. To date, NHS Pensions insist Scheme Pays are irrevocable. However, so was the wholesale move to the 2015 scheme which landed many in this situation, which was subsequently reversed when the Government lost in the Court of Appeal. In a number of cases, it is possible to amend the Scheme Pays election downwards with the tax payment required (along with interest) paid to HMRC directly from savings.
In the meantime, we suggest all clinical staff review their positions carefully, request up-to-date information from NHS Business Services Authority (NHSBSA), and check it against their records. It is staggeringly complicated, so you might want to see if there are financial planners in your area who specialise in the medical sector and your pensions.
