How will recent changes impact your NHS pension?

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After another year of changing rules and regulations, the pension landscape for NHS members has never been more complex. We have seen headline changes such as the removal of the lifetime allowance, the annual allowance increasing and the introduction of flexible retirement options. Alongside this, the McCloud remedy has been ‘finalised’ and is starting to be implemented for members across the scheme.

 

The McCloud remedy: what happens next?

After years of waiting, the McCloud remedy – new changes introduced to address age discrimination arising from public sector pension reforms in 2015 - is finally being processed, and over the next 12 months, the NHS pensions agency will be writing to members who have been impacted and providing an updated statement.

Eligible members are those who were a member of a public sector pension scheme on 31 March 2012 and who either (a) continued in service between 1 April 2015 and 31 March 2022 (or retirement date if earlier) or (b) left the service but returned within five years. 

There are two key parts to the remedy that go hand in hand: the impact to your annual allowance tax position and the impact on your accrued pension benefits.

1. The impact to your annual allowance tax position

Firstly, when thinking about your tax position, almost all members will see this change. You may see a reduction in your value of scheme pays debts or even be eligible for a tax rebate.  There will be some instances where your tax position worsens because your benefits have improved. It is important that your personal position and the complex calculations are reviewed, and any amendments actioned.

2. The impact on your accrued pension benefits

The second impact relates to the amount of pension you have accrued and whether it is better to receive legacy scheme or reform scheme benefits for the remedy period. This is called the McCloud choice. You will be offered this choice on retirement from April 2024. If you retire before this date, you will be contacted and asked to make your choice. For others, the choice will be made at a later date but understanding this as soon as possible may be essential to your retirement planning strategy.

 

What does the removal of the Lifetime Allowance mean to you?

In the 2023 Spring Budget, the Government announced the Lifetime Allowance (LTA) tax charge would be abolished. Alongside this change, the maximum tax-free lump sum value was frozen at £268,275. This is 25% of the former LTA of £1.073m. Any lump sum taken above this amount will be subject to a tax charge. A lower tax-free lump sum may impact on your retirement plans.

If you have a protected LTA in place, you may retain the right to a higher tax-free lump sum. The rules surrounding LTA protection schemes are complex and if you have them in place, they should be reviewed. Plus, there is still scope for some members to apply for protection. Subject to qualifying conditions this could offer an increased tax-free lump sum.

The removal of the LTA is good news but there is scope for people to make costly mistakes, potentially missing out on thousands of pounds of tax-free cash.

Members who have also contributed to a personal or other pension scheme should look carefully at how this interacts with their NHS benefits.

Additionally, the removal of the LTA and increased annual allowance – from £40,000 to £60,000 - also means that previous decisions to opt out of the scheme should be urgently reviewed.

There may be a ‘window of opportunity’ for some members to take action now as there is no guarantee that we will not see the LTA reintroduced, or annual allowances reduced in the future.  

 

What are the changes to your retirement options?

Following a recent consultation, there have been some significant changes to the retirement options available to NHS staff. If you are considering taking partial retirement, retiring and returning, retiring and rejoining the scheme, or would like to access some of your accrued pension, it is important to understand which option is best for you.

The most recent change is the introduction of partial retirement from October 2023. This allows members of the 1995 scheme to access their pension benefits and continue to work without a break in service whilst continuing to accrue benefits within the 2015 scheme. The option was previously limited to members of the 2008 and 2015 schemes.

The NHS has released the criteria required for members to utilise partial retirement, however, the release of the promised partial retirement calculator has been delayed.

There is a lot more detail on partial retirement and other options for members to consider and it is important that members are aware of the key differences of the options mentioned above.

 

Find out how you are impacted

With the landscape constantly evolving, it has never been more important to take a step back and understand your NHS pension.

Alongside the McCloud remedy and greater flexibility, we have a complex tax situation and pension regulations constantly changing. This means that it is vital that you look at how this impacts you and all is up-to-date and accurate. Small errors can have major consequences, especially when the numbers might influence crucial life choices such as when to retire and how much pension you will be entitled to.

It is also important to have experts on hand to help you navigate the path ahead. After decades of service to the NHS, you deserve to enjoy your retirement, however you choose to spend it.