How voluntary contributions are affected by the public service pensions remedy
Find out how to treat member’s voluntary pension contributions following the public service pensions remedy (also known as McCloud).
During the remedy period (1 April 2015 up to and including 31 March 2022), pension scheme members may have made member voluntary contributions to your pension scheme to either:
- buy added pension, including benefits accruing at a higher rate than the standard accrual rate under the scheme
- allow their pension to be paid earlier without reduction, known as effective pension age (EPA) or early retirement reduction buy out (ERRBO)
You will need to check how these payments have been affected by the remedy.
How Chapter 1 schemes are affected
Voluntary contributions made into a Chapter 1 new scheme during the remedy period are not automatically rolled back into the legacy scheme. This is because under the public service pensions remedy rollback of pensionable service from Chapter 1 new scheme to Chapter 1 legacy scheme does not affect voluntary contribution arrangements.
However, there are times where you will be able to change how voluntary contributions are treated.
Generally, changes to pension scheme regulations made under the remedy will mean that scheme rights for voluntary contributions under the Chapter 1 new schemes will be extinguished and either:
- the scheme manager will pay compensation equivalent to the voluntary contributions paid to the Chapter 1 new scheme, minus an amount equivalent to any tax relief given on those contributions
- pension rights will be given under the Chapter 1 legacy scheme:
- of the same value to the rights held under the Chapter 1 new scheme
- that would have been held if the voluntary contributions had been paid to that scheme
Some scheme regulations may change how the remedy applies, so that the rollback applies to voluntary contributions and would also be included within a new scheme benefits election. Where scheme regulations make these changes, voluntary contributions are treated in the same way as pension rights from pensionable service. Therefore, this could affect the members pension input amounts and the annual allowance or lifetime allowance position.
Scheme regulations may give one or more options. The member may be given a choice, or the scheme regulations may impose an option. It is up to schemes to decide what options to offer their members.
If a member makes an election for new scheme benefits, this will not automatically convert benefits from voluntary contributions into new scheme benefits. The scheme regulations will need to allow for pension rights from voluntary contributions made during the remedy period (to either Chapter 1 legacy or new schemes) to be varied, to become new scheme benefits rights. The date the voluntary contribution rights start may not automatically follow on from the date the new scheme benefits election takes effect, this date will depend on the scheme regulations.
Rollback
Scheme administrators of Chapter 1 new schemes will need to recalculate the pension input amounts under their scheme during the remedy period based on:
- rights relating to voluntary contributions paid into the scheme
- rights given as a result of a transfer into the scheme
Extinguishing voluntary contribution rights under a Chapter 1 new scheme
Extinguishing voluntary contributions as a result of the remedy does not change the pension input amounts for pension input periods (PIPs) for previous years. In the PIP which voluntary contribution rights under the Chapter 1 new scheme are extinguished, you should ignore the rights being extinguished when calculating the closing value for that PIP.
Both the opening and closing values for Chapter 1 new scheme arrangement will be calculated with the pension rights from the voluntary contributions. In the following PIPs, you will have to calculate the pension input amounts in the normal way, based on the current rights the member holds under the arrangement.
Any reduction in a scheme pension being paid by the new scheme due to the voluntary contribution rights being extinguished is authorised.
Compensation for new scheme voluntary contributions
It is up to the scheme manager to decide:
- if the member will get compensation as a result of their voluntary contributions being extinguished
- how much compensation to pay
No Income Tax or Capital Gains Tax will need to be paid for this compensation.
If the member wants to use this compensation to purchase voluntary contributions in either the new scheme or the legacy scheme, the normal tax treatment will apply. Any pension rights accrued as a result of those voluntary contributions will count towards the members pension input amount in the tax year that they are paid and may also be eligible for tax relief.
Replacement voluntary contributions
Some Chapter 1 legacy schemes could give the option to replace voluntary contributions made into the Chapter 1 new scheme.
If a member chooses to do this, the legacy scheme administrator will need to create the replacement voluntary contributions rights in one transaction. The replacement voluntary contributions should not be created on a year by year basis, as they were paid over the remedy period.
Tax treatment of replacement voluntary contributions
If the voluntary contributions were paid to purchase extra pension under the new scheme, the extra benefits will have been tested against the member’s annual allowance in the year the voluntary contributions were paid. In the PIP the replacement additional pension rights are created under the legacy scheme, they should be ignored when you’re calculating the pension input amount. This is so the benefits are not tested twice against the member’s annual allowance.
For the tax treatment of deferred members, the replacement contributions should be ignored when you work out their pension input amounts. The member should continue to have a zero pension input amount under the Chapter 1 legacy scheme arrangement in the PIP that the replacement voluntary contributions were created, as well as in future PIPs.
If the voluntary contributions were paid for the earlier payment of benefits (effective pension age (EPA) or early retirement reduction buy out (ERRBO)) under the new scheme, these would not have increased the amount of pension payable at the scheme’s normal pension age. Therefore, the voluntary contributions would not have increased the member’s pension input amount under the Chapter 1 new scheme arrangement and so would not have been tested against the annual allowance when they were paid.
You will need to include the replacement voluntary contributions in your calculations for the pension input amount for the Chapter 1 legacy scheme arrangement in the PIP that they were created. For future PIPs, the replacement voluntary contributions should be ignored when calculating the pension input amount if the member meets the conditions of the deferred member carve out.
Variation of voluntary contribution rights to new scheme benefits
Where a member makes a new scheme benefits election, you will need to allow for any voluntary contributions paid during the remedy period, whether paid to legacy or new scheme, to be varied to become new scheme benefit rights.
The variation can be ignored when calculating the member’s pension input amount in the PIP that the variation occurs if it gives a higher pension input amount.
In the year the voluntary contribution rights are varied, the opening value will be calculated using legacy scheme benefit accrual.
Where the difference between the opening and closing values (based on new scheme voluntary contribution benefit accrual) is the same or less than the difference between the opening and closing values (based on legacy scheme voluntary contribution benefit accrual) the closing value that is used to calculate the pension input amount will be the one based on the new scheme benefit accrual.
Where the difference between the opening and closing values (based on new scheme voluntary contribution benefit accrual) is more than the difference between the opening and closing values (based on legacy scheme voluntary contribution benefit accrual) the closing value that is used to calculate the pension input amount will be the one based on the legacy scheme benefit accrual.
For deferred members, the variation of the voluntary contribution rights will be ignored for the purposes of calculating the pension input amount. The member should continue to have a zero pension input amount under the Chapter 1 legacy scheme arrangement in the PIP the replacement contributions were created, and in future periods.
Where a member with voluntary contribution rights has partially retired and is no longer an active member, the deferred member carve out will apply to them in the same way as a member with no voluntary contribution rights who makes a new scheme benefits election.
Any reduction in a scheme pension being paid by the legacy scheme due to the voluntary contribution rights being varied is authorised.
How Chapter 2 schemes are affected
Voluntary contributions are not affected if a Chapter 2 scheme member makes a legacy scheme election.
When a member makes a legacy scheme election, you will need to recalculate the pension input amounts on their 2015 scheme based on:
- their rights around voluntary contributions paid to the scheme
- any rights given as a result of a transfer into the scheme
If a member has added pension
You must make sure that the 2015 scheme will continue to provide benefits to members for the contributions they made to purchase added pension.
If a member has made effective pension age contributions
For a member who has made effective pension age (EPA) contributions, and makes a legacy scheme election, you must pay compensation to the member that is equivalent to their contributions, minus an amount equivalent to any tax relief given on those contributions. The compensation will not be subject to income tax or capital gains tax.