How will the McCloud judgement affect my pension?

If you were a public sector worker between 2015 and 2022, you will be receiving a letter from the government about the McCloud judgement ruling and your public service pension. This letter may well change your retirement.

In 2015 government pensions changed as part of plans to reduce spending.* Whilst pension income already earned was preserved, many government workers were forced into a pension with a later retirement date that could be pushed back with the State Pension age, whilst the income they receive at retirement could at the same time be lowered.

When faced with the issue that many senior workers would simply retire after this legislation change, transitional protection was put in place to allow older workers to continue in the original pension scheme. Only younger workers under the age of 50 were pushed into the new, less generous pension for any new pension earned.

In the McCloud judgement, the Court of Appeal ruled that the government’s decision to separate pension benefits by age was unlawful age discrimination.** The result has been to unwind seven years’ worth of government policy.

Since 2022 onwards, all public sector workers will be in the new pension scheme. If you are in this situation, here are some points to bear in mind.

What do you need to do?

The government has put a scheme in place called ‘the remedy’ to compensate for this discrimination. If you were a government worker between 2015-2022, you can choose to take an income at retirement from the new or the older scheme. This choice of pension benefits when the pension becomes payable is referred to as a ‘deferred choice underpin’ or ‘DCU’.*** The new pension might offer you all you need, but the DCU gives you an additional foundation on which to build a retirement.

You will not need to decide now as this is deferred until your retirement date. When you come to retire you will be presented with a choice between the old scheme or the new scheme.

Most people will be better off for being in the older scheme. However, there are some, particularly those with lower or irregular income who might benefit from the new pension. What you should do now is to ask your pension scheme to tell you the value of each choice. You can then plan your decision well in advance of your supposed retirement date.

For example, the NHS 1995 scheme allows you retire at age 60, whilst the 2015 scheme is linked to your State Pension age – for younger workers age 68. Find out now if you can retire eight years early, then plan for it.

Be aware of a tax charge

Unfortunately for many of those with incomes over £100,000, the ability to claim under the old pension might result in a tax charge.

The amount that can be saved into a pension was reduced for everyone in 2015, with high earners able to put in less than most. Where contributions exceed this, you face an income tax charge on the excess. Simply put, the older scheme is more generous, which in turn means a higher contribution which could mean tax payable.

Your pension scheme will tell you if you are affected by this tax charge. You will have an option to pay with cash, or by reducing your pension. If you are in this situation, you should speak to a financial planner who will be able to guide you through this process.

Seek advice

If you are unsure about how these changes will affect your retirement, or if you haven’t thought about your retirement, you should speak to a financial planner. They can help you to contact your pension scheme and gain clarification. If you are a member of a union, they should also be able to offer you more detailed information.

If you would like to discuss your personal situation with a member of our team, please do get in touch.

* What is the McCloud judgment? Department for Levelling Up, Housing & Communities, 2023

** Lord Chancellor v McCloud & Ors, 2018

*** HM Treasury, Important Choice for Public Servants – Your Pension, 2023