How benefits of Chapter 3 members are affected by the public service pensions remedy
How benefits, charges and payments for pensions of Chapter 3 (local government) members are affected by the public service pensions remedy (also known as McCloud).
If you’re a pension scheme administrator of Chapter 3 schemes, check the impact of the public service pensions remedy on the benefits for pension scheme members.
Final salary underpin
As the public service pensions remedy extends the final salary underpin to all Chapter 3 members with remediable service, some members will receive additional benefits. The tax treatment of benefits already paid should not change for earlier years where there is an increase and any previous benefit crystallisation events do not need to be revisited.
When the additional benefits are put into payment they should be paid as new benefit crystallisation event.
Scheme pension top-ups
Top-ups paid to members
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 as died
Where you make a top-up payment after the member has died, 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.
Reduction of scheme pensions in payment
Changes made to the final salary underpin may mean that in some rare circumstances the amount of a scheme pension in payment is reduced.
This deduction will be a permitted reduction and any future pension payments will continue to be authorised. If the rate of scheme pension is reduced outside of those circumstances, then every payment made will be an unauthorised payment.
Pension commencement lump sums
Where a member is now entitled to final salary benefits for the remedy period, they may receive a top-up pension commencement lump sum.
Top-ups paid to a member
If you are due to pay an additional pension commencement lump sum to a member, 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-ups to be paid to members
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-ups 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.
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’ rights, if that condition would not be met for a member following the final salary underpin.
Top-ups to be paid to members
Where you have previously paid a small pot lump sum to a member, they may be due extra benefits as a result of the final salary underpin. The top-up will be authorised.
Top-ups 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 final salary underpin the member may be due a top-up payment, but they die 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 final salary underpin
- 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 final salary underpin 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.
Serious ill-health lump sums
Top-ups paid to members
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 final salary underpin. 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
Where you have previously paid a serious ill-health lump sum and the extra benefit that is due as a result of the final salary underpin 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 legal personal representatives’ 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 final salary underpin 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)
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 final salary underpin.
Top-ups paid to a 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 final salary underpin 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.