HMRC: LGPS McCloud Pension Statements Required for Tax Changes

• The McCloud remedy requires Local Government Pension Scheme administrators to extend a pension accrual underpin to all members with remediable service.
• This extension impacts members' tax positions, necessitating the issuance of benefit crystallisation and pension savings statements.
• A deadline of October 6, 2024, was set for providing pension savings statements to members whose benefits increased due to a final salary uplift exceeding the annual allowance.
• Previous annual and lifetime allowance charges from 2015-2016 to 2022-2023 may have changed, potentially leading to compensation claims or new tax liabilities.
• Scheme managers are responsible for deciding and paying compensation for reduced charges from the 2015-2016 to 2018-2019 tax years.

The responsibility for determining whether to pay compensation, its amount, and the actual payment rests with the scheme managers.

Local Government Pension Scheme (LGPS) administrators are currently navigating the complexities introduced by the public service pensions remedy, widely known as McCloud. This remedy specifically impacts what are termed 'Chapter 3' pension schemes, encompassing both legacy schemes, where benefits accrued on a final salary basis before April 1, 2015 (or April 1, 2014, for England and Wales), and new schemes, which shifted to a career average revalued earnings (CARE) accrual from those same dates.

The McCloud remedy's application is confined to members possessing 'remediable service,' meaning they were either in pensionable service or eligible to join the scheme prior to March 31, 2012. This includes specific scenarios such as 'excess teacher service,' where a teacher holds both full-time and part-time employment concurrently, with the latter being pensionable within the LGPS. A key change under the remedy involves extending a crucial 'underpin' protection to all members with remediable service. Previously, this underpin, which guaranteed members the higher of CARE or final salary accrual during the remedy period, was only afforded to protected members following the transition of all LGPS members to CARE accrual from April 1, 2014 (for England and Wales) and April 1, 2015 (for other new schemes).

The extension of the underpin to all eligible members carries significant implications for their tax positions, necessitating immediate action from scheme administrators. Administrators are now required to issue both benefit crystallisation statements and pension savings statements to affected members. This administrative burden is critical for ensuring compliance with HMRC LGPS McCloud pension statements guidelines.

Specifically, if a member's benefits increased due to the final salary uplift during a remedy period year, leading to an excess of the annual allowance for that tax year, a pension savings statement was required to be provided to the member by October 6, 2024. Furthermore, if a member's pension input amount has changed for reasons other than the final salary uplift, administrators may need to issue revised pension savings statements to reflect these adjustments.

The McCloud remedy also mandates a review of previously incurred annual allowance or lifetime allowance charges, which may have altered in value for members. For charges levied between the 2015-2016 and 2018-2019 tax years, inclusive, members will not be eligible for a refund of any overpaid charges. However, if a charge has reduced in value, members are entitled to apply for compensation. The responsibility for determining whether to pay compensation, its amount, and the actual payment rests with the scheme managers.

For the subsequent period, covering the 2019-2020 through 2022-2023 tax years, inclusive, members might experience changes in the value of their previous charges. This could result in new or additional tax charges, or conversely, the opportunity to claim a refund of tax already paid. Such scenarios may necessitate the provision of revised pension savings statements. To assist members in understanding these adjustments, a dedicated online tool, the 'Calculate your public service pension adjustment service,' is available to help them ascertain any changes to their tax charges for these specific years.

Source: Original reporting via GOV.UK guidance