How benefits of Chapter 2 members are affected by the public service pensions remedy
How benefits, charges and payments for judicial pension schemes of Chapter 2 members are affected by the public service pensions remedy (also known as McCloud).
If you’re a pension scheme administrator of Chapter 2 judicial pension schemes, check the effect of the public service pensions remedy on the benefits for pension scheme members.
If a member makes a 2015 scheme election
If a member makes a 2015 scheme election, their basic pensionable service for the remedy period, will be treated as always having been within the 2015 scheme, not the legacy scheme.
Top-ups to scheme pensions
The options exercise may increase the amount of benefits that are payable that you pay to a member.
Top-ups paid to a member
When you pay extra pension to a member as a result of the remedy, it is an authorised payment and 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
Where you make a top-up payment after the member has died, following the options exercise, it is not considered to be a death benefit.
Any top-up pension payment made 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
The options exercise may increase the amount of benefits payable to a member, giving them the option to be paid a bigger lump sum.
Top-ups paid to a member
If you are due to pay a pension commencement lump sum to a member as a result of the options exercise, 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 make an additional payment of 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
Lump sums already paid
If you have already paid a trivial commutation lump sum to a member, that 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
- £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
- £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 dependant’s 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 options exercise 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 where this is as a result of the remedy.
Serious ill-health lump sums
Payments already made
Where you have previously paid a serious ill-health lump sum to a member, if their pension rights increase as a result of the options exercise, 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-ups 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 the options exercise. 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-ups paid after a member has died
Where you have previously paid a serious ill-health lump sum and the extra benefit that is due as a result of the options exercise is payable after the member has died, it is not a lump sum death benefit. It may be paid as a serious ill-health lump sum, 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 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 options exercise 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 payment
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 member’s rights, if that condition would not be met for a member following the options exercise.
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 options exercise. The top-up will be authorised.
Top-up paid after a member has died
As a result of the options exercise 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 options exercise
- 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 arising from the options exercise 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 sums
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 options exercise.
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.
Reducing a scheme pension to pay lifetime allowance charges
Where the member’s benefit crystallisation event increases as a result of the options exercise, 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 that arises as a result of the options exercise.