The unique position of judges and their non-standard Judicial Pension Scheme means that opting for the “immediate choice” solution to McCloud is a “no-brainer”, experts have said, despite the rest of the public sector taking a different course.
The Ministry of Justice announced in February that members of the Judicial Pension Scheme would face their “immediate choice” in 2022, settling the discrimination that arose as a result of the 2015 public sector pension reforms.
As Pensions Expert reported at the time, judges will be able to choose between the pre-2015 schemes, either the Judicial Pension Scheme or the Fee-Paid Judicial Pension Scheme and the New Judicial Pension Scheme established in 2015.
Judges have always been a law unto themselves as regards their pension arrangements and the earlier judicial pension schemes are completely non-standard as regards civil service pensions
Penny Cogher, Irwin Mitchell
The choice will be offered to those “aged under 55 on April 1 2012 and in service on or before March 31 2012 and on or after April 1 2015, and eligible for a judicial pension on those dates”, according to the MoJ’s consultation.
Much of the rest of the public sector has opted for the alternate solution, known as the deferred choice underpin, under which members would choose at retirement which of the schemes, legacy or reformed, would give them a better pension.
However, the non-standard nature of the Judicial Pension Scheme, and especially its tax arrangements, is thought to have swayed the MoJ’s decision to opt for the immediate choice route.
Mr taxman, bring me a dream
Moira Warner, senior pensions development and technical manager at Royal London, told Pensions Expert that, in contrast with the rest of the public sector, there was very little doubt that the vast majority of judges would be better off in their legacy scheme.
“The legacy scheme has a better accrual rate — 2.5 per cent of pay for each year of service compared with 2.32 per cent of pensionable pay under the reformed scheme,” she explained.
“Over and above the better pension, the legacy scheme also offers an automatic lump sum of 2.25 times pension, which the reformed scheme does not.”
Warner added: “The normal retirement age under the legacy scheme is age 65, whereas it is linked to the individual’s state pension age under the reformed scheme.”
The untaxed status of the legacy scheme is another significant incentive to opt to remain in it.
“Under judicial pension arrangements, all those who were transitioned from the legacy final salary scheme to the reformed career average scheme were shifted from a [tax] unregistered pension scheme to a registered pension scheme,” Warner explained.
This had negative tax implications for some judges, who may have undertaken legitimate tax planning “having no expectation of ever being shoehorned into a registered pension scheme”, she said.
Daragh McGinty, legal director at Osborne Clarke, said that the new arrangement would have prevented some judges making proper use of their personal allowance.
“Participation in the tax-registered judges’ scheme since 2015 rather than the previous untaxable schemes meant judges lost out on making contributions to a tax-registered scheme of their choice alongside their participation in the original unregistered scheme — if they had remained there,” he said.
“This meant in the period from 2015 they may not have been able to make effective use of their income tax personal allowance; for example, the effective 60 per cent income tax rate that applies from £100,000, or the pensions annual allowance.”
McGinty added that the fact the MoJ has agreed to compensate judges for their financial losses arising from these tax consequences was another reason for offering an immediate choice in 2022 rather than a choice at retirement, because it would “limit any losses and any compensation the MoJ might have to provide around this risk”.
Tax-free arrangement ‘quite shocking’
Irwin Mitchell partner Penny Cogher concurred with the assessment that the vast majority of judges would be better off in their legacy scheme, calling it a “no-brainer” that most would choose to remain in it.
The immediate choice reflects the fact that “judges have always been a law unto themselves as regards their pension arrangements and the earlier judicial pension schemes are completely non-standard as regards civil service pensions”, she said.
“It still seems totally shocking that these earlier pension schemes, although set up and run by the government, were unregistered and so not subject to HMRC requirements.”
However, she cautioned that the government “may regret” the approach it has taken, allowing different departments to opt for their own solutions to McCloud, rather than imposing a uniform remedy.
“[It leaves] it open for civil servants to more easily dispute the process the government has followed,” Cogher said.
She noted that there are other changes “in the pipeline” for the judiciary.
Judges to face immediate choice in McCloud solution
On the go: Members of the Judicial Pension Scheme will be subject to an immediate choice in 2022 in response to McCloud, in contrast to the rest of the public sector’s deferred choice underpin.
“Some of the judiciary are already up in arms about the MoJ’s proposal to introduce a new uniform member contribution rate, leaving the MoJ to give judges the temporary option of reducing their contributions to the scheme in return for a commensurate reduction in the accrual rate,” she said.
“Perhaps the judiciary is keen to hone in on and ‘bank’ what they can have certainty on now.”
