McCloud judgement creates a tough pension dilemma for civil servants – STEVE WEBB offers his verdict

Alongside thousands of other civil servants, both retired and still employed, I have received an offer from the Civil Service Pension Scheme to switch from the Principal Classic pension scheme to the Alpha pension scheme with compensation being paid for the remedy period in accordance with the McCloud judgement.

The information I have received indicates that should I choose to switch to the Alpha scheme that switch will be permanent.

My question is, would it be possible for you to give advice with regard to the short and long term consequences of switching, as there seems to be little information out there to guide us.

Steve Webb replies: While I’m not able to give you personalised advice as to the choice you should make about your civil service pension, I’m happy to set out some of the factors that you and others may want to consider.

Just to recap on the background to all of this, the Coalition Government introduced major changes to public service pensions which took effect in 2015.

Some of these changes included ‘transitional protection’ for those close to pension age.

But a subsequent Court of Appeal judgment (commonly known as the ‘McCloud judgment’) ruled that the way this was done was illegal on age discrimination grounds.

In response to this judgment, the Government has come up with a set of measures to provide a ‘remedy’ for the harm that was done.

A key feature of the remedy is that for the period from 2015 (when the changes were due to be implemented) to 2022 (after which all workers are moved to the new arrangements), members will be able to make a choice as to which scheme – old or new – they want to be a member of.

In your case, you can choose whether to be in the old (‘Classic’) scheme for these seven years, or be in the new (‘Alpha’) scheme.

For people who have not yet drawn their pension, and have not had any communication yet, there is nothing to be done for now, as they can make their decision at retirement.

But a large group of civil servants who have already started to draw their pension are being asked to make an ‘immediate choice’ as to which scheme they want to come under for the years in question.

These letters started going out in January of this year and the Civil Service Pension Scheme has indicated that it could take the best part of two years to send out all the letters.

There is quite a lot of information about how all of this works on the Civil Service Pension website, including videos and extensive answers to ‘Frequently Asked Questions’.

Although the process is known as ‘immediate choice’, it is important to stress that you do not have to make a snap decision.

You have up to a year from the date of their correspondence to make your choice, and clearly would not want to rush into anything.

Turning now to the choice itself, it may surprise people that this is not straightforward. After all, would you not simply choose whichever scheme gives you a bigger pension?

The short answer is that there is more to this choice than simply picking the larger number for pension at retirement.

One key difference between the different schemes is how much tax-free lump sum you can take.

For some people there could be a trade-off between the size of their starting pension and the size of their tax-free cash under the two different schemes.

The best choice will vary from person to person, depending on things like their individual tax position or how far they want to ‘front load’ their income in retirement.

A second factor to consider is provision for a surviving spouse or partner. For scheme members who are part of a couple, there are differences in the level of ‘survivor’ benefits offered between the ‘Classic’ scheme and the ‘Alpha’ scheme which is something that you may want to consider.

This includes differences in what happens if a surviving partner remarries, and differences in the treatment of unmarried partners between the two schemes.

There are also differences in the percentage of a member’s pension which continues to be paid to a survivor after their death and differences in what pension that percentage is applied to.

A helpful guide to these and other issues has been prepared by the Prospect trade union and can be found here.

There are also potential tax issues with all of this.

For example, if you opt to be in a more generous pension arrangement than the one you were actually in, this is likely to result in a lump sum of pension arrears and this lump sum (plus any interest due) will be taxable.

You need to make sure you understand the size of any lump sum arrears – and how it will be taxed – as part of your decision-making.

For higher earners there could also be highly complex issues about potentially generating a tax charge (or tax charge refund) and you should ideally obtain specialist tax advice if this might be an issue for you.

There is more information on potential Annual Allowance issues here and on potential Lifetime Allowance issues here.

For understandable reasons, the Civil Service Pension Scheme cannot tell you what you should do, as this will depend on your individual circumstances, but they should certainly provide you with all the factual information that you need to make an informed choice.

If you feel that they have not done so, and that the website also does not provide answers to your questions, then you have every right to go back to the scheme and ask for further information before you make this irrevocable decision.