Teachers, nurses and civil servants must make key decisions on pensions and the tax implications.
Teachers, nurses and civil servants are fast having to make a vital decision about their pensions, and experts are warning millions will need guidance to avoid costly mistakes.
At issue is an impending decision by the government about how it will implement the so-called ‘McCloud judgment’ on age discrimination in public sector pensions.
The government is consulting on two options for members of the relevant public sector pension schemes, in relation to their membership from 2015/16 to 2021/22.
Under the first option – known as ‘immediate choice’ – pension members would decide now whether to be put in the pre-reformed scheme for that period, or post-reform scheme.
The alternative ‘deferred choice underpin’ would require savers to make no decision at this stage – waiting instead until they retire, when they would be able to choose whichever scheme turned out to have produced the highest pension.
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For many in the public sector the decision will not be straightforward, cautioned pension consultancy LCP, because the right answer for them might depend on their age, health, retirement plans and expected career path.
Savers, LCP added, would need to be given considerable guidance to help them make the best decision for them, including modelling tools to allow them to explore their options.
Those with the most complex affairs, such as high-earning NHS staff, would almost certainly need tailored financial advice to make sure they took account of the tax implications of their choice.
Luke Hothersall, partner at LCP said: “Letting members choose the best scheme for them now would have the advantage of resolving this messy business once and for all, rather than running dual records for decades to come.
“But that choice is not a simple one for many members, and it is vital this is accompanied by a meaningful level of guidance and support.”
LCP is urging the government to give affected public sector workers an immediate choice.
It argued the move would give a clear picture to savers about how much they can expect in retirement, allowing them to plan their pension income with more confidence.
Communications to savers, including via the planned pensions dashboard, would be on the basis of a single, definite set of benefits, rather than having to reflect alternative possible pension outcomes.
Members would also have the certainty of resolving matters now, rather than relying on a future government to honour their promise at retirement, LCP added.
A decision now is better for pension providers, who would otherwise have to operate a system of ‘dual records’ for decades.
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In April 2015, the public service pension schemes were reformed, after the cost of the legacy schemes had significantly increased over the previous decades.
Under the reforms, those within 10 years of retirement remained in their legacy pension schemes. In December 2018, in what is known as the McCloud judgment in reference to one of the judges who brought an employment tribunal on the issue, the Court of Appeal found this part of the reforms unlawfully discriminated against younger pension scheme members.
The Courts required this unlawful discrimination be remedied by the government.
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