How benefits of Chapter 1 members are affected by the public service pension remedy
How benefits, charges and payments of pension to Chapter 1 members are affected by the public service pensions remedy (also known as McCloud).
How benefits that have already been paid are affected
All Chapter 1 pension scheme members who have pensionable service under the new scheme will have had their pensionable service rolled back to the legacy scheme on or before 1 October 2023.
After the rollback, any benefits that have already been paid to the member by the new scheme are treated as having been paid by the legacy scheme.
This means that the legacy scheme administrator is responsible for the tax and reporting of these payments.
Where the new scheme administrator is already paying benefits from the new scheme, they will need to identify which benefits remain in the new scheme and which will be rolled back to the legacy scheme. Benefits relating to pensionable service built up before 1 April 2022 should be rolled back. Benefits relating to pensionable service built up on or after 1 April 2022 should remain in the new scheme.
The treatment of benefits paid as a result of member voluntary contributions, or from a transfer into the new scheme during the remedy period will depend on the scheme’s regulations.
The new scheme administrator should stop paying benefits relating to service rolled back to the legacy scheme, however they are still responsible for paying benefits left in the new scheme.
The legacy scheme administrator is responsible for paying rolled back benefits, as well as benefits that have already crystallised under their scheme.
The legacy scheme should not change the amount of benefits, legacy benefits in payment, or rolled back benefits until either:
- they receive a new scheme benefit election from the member
- they receive an immediate choice decision that no new scheme benefit election is to be made
- the member’s election period has come to an end
As a result of the immediate choice, the legacy scheme may need to reduce or increase the member’s benefits. This may also affect the level of death benefits payable for members with remediable service who dies before 1 October 2023.
How benefit crystallisation events are affected
Any benefit crystallisation event that occurred under the new scheme will be treated as if it occurred under the legacy scheme — this could be in full or in part.
The new scheme will keep the crystallised benefits of any service that related to pensionable service on or after 1 April 2022. Scheme regulations may also let the new scheme keep crystallised benefits that came from:
- member voluntary contributions
- transfers received into the scheme
The amount of any benefit crystallisation event that occurs under the legacy scheme, and whether it needs to be rewritten, will depend on the status of the member (protected, unprotected or taper-protected), the member’s immediate choice of benefits, and the options available under the terms of the legacy scheme regulations.
A protected member will only need their benefit crystallisation event under the legacy scheme rewritten if they make a new scheme benefits election.
Where an unprotected member makes a new scheme benefits election, the amount of their total benefits should not change, meaning the total of the benefit crystallisation events should not change. However, there will be a change in the individual benefit crystallisation events as the amount of the event under each scheme will change.
The amount of the benefit crystallisation event will change for:
- taper-protected members
- protected members who make a new scheme benefits election
- unprotected members who make an immediate choice not to take new scheme benefits
Read more information about benefit crystallisation events in public sector schemes, or benefit crystallisation events in private sector schemes.
Members with a protected pension age
Members with a protected pension age under 55
Some legacy scheme members may have a protected pension age of 55, allowing them to take their pension and lump sum before they reach this age.
Where, during the remedy period a taper or unprotected member used their protected pension age to start to receive benefits under the legacy scheme, and they make an immediate choice for legacy benefits, their rolled back benefits crystallise on the same date as the other legacy scheme benefits.
If the legacy scheme benefits do not crystallise on the same date, any payments made before the member reaches their normal minimum pension age will be unauthorised payments. You will need to report these as unauthorised payments on the Event Report.
If a member has received benefits and had a protected pension age, makes a new scheme benefits election, it will not be possible for the new scheme benefits to crystallise on the same date as the benefits that are already in payment from the legacy scheme. The remedy does not allow new scheme benefits to be put into payment from an earlier date than allowed under the scheme, meaning that benefits cannot be paid before the member is 55.
When a member has made an immediate choice or deferred choice, the effect of making a new scheme benefits election is ignored when deciding if the member is entitled to all benefits under the legacy scheme on the same day. This means that:
- members who are receiving benefits before 1 October 2023 are able to continue to receive benefits before normal minimum pension age as authorised payments
- members can receive legacy scheme benefits for service before the remedy period and before they reach normal minimum pension age had a protected pension age — and they still make a new scheme benefit election leaving remediable service benefits uncrystallised
Members with a protected pension age under 57
The normal minimum pension age will increase to 57 on 6 April 2028 for a pension scheme that is not a uniformed services pension scheme. Members who had an unqualified right to take benefits before they are 57 may have a protected pension age of less than 57, if this right was in place on 3 November 2021.
As a result of rollback, unprotected and taper-protected members were not members of the new scheme on 3 November 2021 and so could not have a protected pension age under that scheme.
The rollback of benefits should be ignored when establishing if the member had an unqualified right to take benefits on 3 November 2021. This means that a member who would have been eligible to use this type of protected pension age should not lose the protection due to the rollback.
Top-ups to scheme pensions
If a member makes an immediate choice, this could increase the amount of benefits that are payable.
Scheme pension arrears paid to members
You must deduct tax from the pension payment under the PAYE system. The arrears of a scheme pension are taxable in the year the member became entitled to the pension. If, because of the arrears being paid as lump sum the member has paid more tax than was due, the member can reclaim the overpaid tax.
Top-ups paid after a member has died
As the top-up payment is payable due to the immediate choice, it is not covered by the usual pension death benefit rules or regulations.
Any top-up payment made in relation to a pension which is as a result of the remedy and paid after the member’s death is authorised. The payment will not be a benefit crystallisation event and should be taxed as pension income in the year in which the payment is made.
Pension commencement lump sum
Some schemes have previously paid lump sums that were more than the maximum permitted amount. The part of the lump sum above the maximum permitted amount is an unauthorised payment and cannot be treated as a pension commencement lump sum.
If the member’s immediate choice increases the amount of their scheme pension, this can have the effect of increasing the maximum lump sum available and so decreasing the amount of the unauthorised payments charge.
If the member’s immediate choice reduces the amount of their scheme pension, this can decrease the maximum lump sum available. The overpaid amount can be treated as always having been a pension commencement lump sum. This stops the overpaid amount from being an unauthorised payment.
If the member previously chose not to take the maximum possible pension commencement lump sum, the amount of the lump sum paid to the member could still be within the maximum limit based on the reduced scheme pension.
Top-ups paid to members
If you are due to pay a pension commencement lump sum to a member as a result of their immediate choice, it may not be paid within the standard period of one year. The payment will still be a pension commencement lump sum if (both):
- it could not reasonably have been paid within the standard payment period
- had it been paid within the standard payment period, it would have been a pension commencement lump sum
Top-ups paid after a member has died
If you need to pay an additional amount of a pension commencement lump sum after a member has died, you should treat the payment as a pension commencement lump sum if it would have been treated as such if it were paid within the standard payment period.
The payment is not a lump sum death benefit and should be treated as a new benefit crystallisation event when the top-up lump sum is paid. The amount crystallised is the amount of the pension commencement lump sum payment.
Trivial commutation lump sum
Payments already made
If you have already paid a trivial commutation lump sum to a member, the lump sum continues to be a trivial commutation lump sum even where, as a result of the member’s increased rights, either:
- this increase would mean that on the nominated date, the value for the member’s pension rights was more than £30,000
- the member’s rights had not been extinguished when paying the original lump sum
Top-up paid to a member
Any top-up payment that is made to a member, as a result of the remedy, will be treated as a trivial commutation lump sum if (either):
- the top-up payment is less than £10,000
- the top-up payment is £10,000 or more, but the total of the top-up payment and the value of the member’s rights on the nominated date is less than £30,000
If these conditions are not met and you make the lump sum payment, it will be an unauthorised payment. You can choose instead to pay pension benefits to a member as authorised payments.
Top-up paid after a member has died
As a result of the remedy, if you are due to pay a top-up payment to the trivial commutation lump sum after the member’s death, you may be able to pay this as an authorised payment in certain circumstances.
The top-up payment will be treated as a trivial commutation lump sum if it would have met the conditions to be so if it had been paid to the member, and (either):
- the top-up payment is less than £10,000
- the top-up payment is £10,000 or more, but the total of the top-up payment and the value of the member’s rights on the nominated date is less than £30,000
When deciding if the payment would have been a trivial commutation lump sum if it was paid to the member, the conditions relating to the timing of the payment and the maximum amount are not applicable.
If these conditions are not met and you pay a lump sum payment, it will be an unauthorised payment.
Trivial commutation lump sum death benefit
For a payment to a dependant of a member who has died, to be a trivial commutation lump sum death benefit, the payment must extinguish the dependants’ rights to pension death benefits and lump sum death benefits.
Where a trivial commutation lump sum death benefit has been paid, and as a result of the immediate choice there is a further lump sum payable but the condition to extinguish all rights has not been met, that condition will not be taken into account.
Serious ill-health lump sums
Payments already made
Where you have previously paid a serious ill-health lump sum to a member, if they make an immediate choice which provides more pension rights, a previous serious ill-health lump sum payment will remain a serious ill-health lump sum even though this would mean that the member’s rights were not extinguished by the original payment.
Top-up paid to a member
Where you have previously paid a serious ill-health lump sum to a member, they may be due extra benefits as a result of their immediate choice. The extra benefits paid to the member will be treated as a serious ill-health lump sum if both:
- the top-up payment extinguishes their extra benefit entitlement
- it meets the conditions to be a serious ill-health lump sum
Top-up paid after a member has died
A payment of a serious ill-health lump sum is only an authorised payment if it is paid to the member. The top-up to a serious ill-health lump sum is payable as a result of the immediate choice does not fall within the lump sum death benefit rule.
Where you have previously paid a serious ill-health lump sum, the extra benefit that is due as a result of the member’s immediate choice may be paid as a serious ill-health lump sum after the member’s death, if both:
- the member had available lifetime allowance at the time the lump sum is paid
- the payment extinguishes the extra benefit entitlement
The making of the top-up payment will be treated as a new benefit crystallisation event at the time of the payment of the lump sum— the amount crystallised is the amount of the top-up payment. Any tax that is due on this payment will be subject to tax at the beneficiary’s marginal rate.
Defined benefits lump sum death benefits
Where you have previously paid a defined benefits lump sum death benefit for a member with remediable service, the effect of the immediate choice may be that the death benefit was underpaid. A further defined benefits lump sum death benefit may be due.
The remedy allows for the additional defined benefits lump sum death benefit to be treated as being paid within the relevant 2 year period even when it is not, if the original defined benefits lump sum death benefit was paid within 2 years of the date you found out about the member’s death (or reasonably could have known about their death).
Small commutation payments
Payments already made
Where you have already paid a small pot lump sum to a member, you can ignore the condition that the payment of the lump sum must have extinguished the members rights, if that condition would not be met following a member’s immediate choice.
Top-up paid to a member
Where you have previously paid a small pot lump sum to a member, they may be due extra benefits as a result of the immediate choice. The top-up will be authorised.
Top-up paid after a member has died
A payment of a small pot lump sum is only an authorised payment when it is paid to the member. As a result of the immediate choice there may be a top-up payment but they died before this was paid. As the top-up would not be payable as a result of the death of a member, it does not fall within the lump sum death benefit rule.
Where a top-up payment is due to a previously paid small pot lump sum, it is authorised and taxed in the same way as a trivial commutation lump sum if both:
- it is due as a result of the immediate choice
- it would have been paid to the member while they were alive
Dependants’ scheme pension
You can make the payment of a top-up to the dependants’ scheme pension that arises from the immediate choice that would have been paid to the dependant, but they have died or are too old to qualify as a dependant.
Where the top-up to the dependants’ scheme pension is paid to an individual who was a child dependant, the payment can be treated as accruing in the tax year it should have been paid. Where the top-up payment is paid to the personal representatives of the dependant who has died, this should be treated as accruing in the tax year it is paid.
Lifetime allowance excess lump sum
Where a member who has remediable service was paid a lifetime allowance excess lump sum, the tax treatment of that lump sum may change as a result of the immediate choice.
Top-up paid to the member
You can make the payment of a top-up lifetime allowance excess lump sum where, at the time of the payment, the member is 75 or older when the member makes a new scheme benefits election, which increases the amount of benefits that are in payment.
The benefit crystallisation event for this lifetime allowance excess lump sum happens when the member receives an actual right to receive the lump sum. This will be before the lump sum is actually paid.
Treatment of lump sum where lifetime allowance is no longer used up
As a result of the member’s immediate choice, the amount of lifetime allowance used up by the benefit crystallisation event may reduce. This means that a payment that was a lifetime allowance excess lump sum is no longer, partly or wholly, a lifetime allowance excess lump sum.
The lump sum should be treated as being, and always being a lifetime allowance excess lump sum to the extent that it exceeds the member’s available lifetime allowance. The amount of the lump sum that is now within the member’s available lifetime allowance is authorised and 25% can be paid tax free.
The remaining amount of the lump sum is taxable at 40%. This charge can be offset against the lifetime allowance paid on the original lifetime allowance excess lump sum.
Overpaid pensions
If, as a result of the member’s immediate choice, the amount of pension they are entitled to is reduced, you will have to rewrite the member’s previous benefit crystallisation event.
Authorisation and tax treatment
The remedy states that the payments of overpaid pension are both:
- authorised payments
- taxable as pension income in the year that the payment was made
Overpayments of scheme pension, as a result of the remedy, are authorised payments.
Repayment of overpaid pension
It is your decision whether to recover overpaid pension from the member. If you choose to recover the overpaid pension by deducting this from future pension payments, this deduction will be made after tax has been calculated and deducted from the pension payment.
Reduction of scheme pension
Reductions of scheme pension to pay lifetime allowance charge
Where the member’s benefit crystallisation event increases as a result of their immediate choice, it may result in you becoming liable to a new or additional lifetime allowance charge.
The annual rate of scheme pension may only be reduced in certain circumstances. If the annual rate of scheme pension is reduced outside of these circumstances, every ongoing payment of the scheme pension will be an unauthorised payment.
You can make a permitted reduction to the rate of scheme pension to pay a lifetime allowance charge which comes as a result of the immediate choice.
Overpaid defined benefits lump sum death benefits
A beneficiary of a member who has died may have been paid a defined benefits lump sum death benefit. If, as a result of the immediate choice in respect of a deceased member, the amount of the defined benefits lump sum death benefit payable is less than the amount paid, the overpaid amount will still be an authorised payment. There is no change in the amount crystallised by any benefit crystallisation event.
It is up to you if want to pursue repayment of an overpaid defined benefits lump sum death benefit and how you will ask to be repaid, but you cannot undo the original tax treatment of those payments just by having the amount repaid.
Where the overpaid defined benefits lump sum death benefit is repaid in full, this is treated as never having crystallised. This prevents the overpaid amount, that has been repaid, from using up part of the member’s lifetime allowance.