Against a background of historically low interest rates, increasing life expectancy and the consequent growing burden on the taxpayer, the government introduced extensive reforms to public-service pension schemes in 2015. These resulted in less generous retirement arrangements, including higher pension ages for millions of public-sector staff, among them senior members of the legal profession.
The reforms increased the normal judicial pension age from 65 to a member’s state pension age and replaced final-salary schemes with new schemes based on a career-average design.
Tax disadvantages of NJPS
Critically, the legacy schemes were not tax-registered and therefore they were not subject to annual and lifetime limits on the tax-relieved benefits they could accrue. However, tax-registered schemes – such as the NJPS – are subject to these limits.
The Annual Allowance (AA) is a cap on the amount you can save into pensions each tax year, whilst earning tax relief. This is £40,000 for 2020/21 and reduces where total income exceeds £240,000 (it could get as low as £4,000).
The Lifetime Allowance (LTA) applies to the value of pension benefits (inclusive of private pensions that barristers may have made or are making and accrual under the NJPS) and is currently £1,073,100 (subject to certain protections that exist).
Judicial schemes were the only public-service schemes that were not formerly tax-registered. Therefore, in addition to being moved to a generally less beneficial scheme, judges also became subject to the annual and lifetime limits, a move which The Ministry of Justice has accepted was especially costly for high earners and for those who had built up significant private pensions.
Planning considerations
The ongoing deliberations relating to the judicial pension schemes, the impact upon allowances and the generally more complex tax affairs of the self-employed such as barristers, mean that financial advice should only be sought from those advisers with a specialist knowledge of this complex area.
The AA must be correctly calculated after taking into consideration the tapering rules and an accurate assessment of the likely accrual under the NJPS needs to be made so that the total pension benefits for the year remain within the AA.
There are also other considerations, such as Enhanced and Fixed protection, that need to be taken into account when deciding on the way forward.
Judges’ views on pensions proposals
In July 2020, the government announced proposals to remedy the unlawful age discrimination found in the December 2018 McCloud judgement. The Ministry of Justice launched a consultation process seeking views on these proposals from the judiciary – in particular, those affected by the discrimination identified in the McCloud case. The consultation process closed on 16 October 2020 and its outcome is expected early in 2021.
The government’s proposals should ensure that no member of the judiciary is worse off than prior to the introduction of the reforms in 2015. Moreover, the government has said that all qualifying individuals will be able to receive the benefits to which they are entitled, whether they have lodged a legal claim or not.
The relatively simple changes proposed by the government are much more complex on closer inspection, with many interconnected rules that need to be carefully considered. It is critical therefore to seek financial advice from an expert before taking any action. Failure to do so could result in a hefty tax bill(s), and potentially a far less generous pension than members were expecting in retirement.
You can read a longer, more detailed article on this subject here.