Judicial Pensions

1. Judicial Pensions Information on proposed plans for reform 5 February 2013

2. What this pack contains • Background to the reforms and overview of the 2012 proposals • Summary of the plans for reform • Key features of the proposed New Judicial Scheme • Flowchart – What does this mean for me? • Transitional protection (full and tapering) • Transitional protection allowance option • Information on contributions, retirement, implications of standalone judicial scheme • Information on Tax Issues • Suggested Next Steps • Case Studies • Summary of planned future legislative changes which may affect judges’ pensions

3. Background to the reforms • June 2010 - Government commissioned Lord Hutton to review public service pension provision. Proposals for pension reform should protect accrued rights and be: • Affordable and sustainable in the long term • Fair to public servants and the taxpayer • Consistent with fiscal challenges ahead • Lord Hutton recommends: • Higher member contributions (interim report, October 2010) • New schemes with stronger governance, a career average structure, higher pension age and a “cost ceiling” to keep future costs under control (final report, March 2011) • Government sets out its “preferred scheme” and intention to protect from the changes those within 10 years of pension age at April 2012 (“Good Pensions that last” - Cm 8214, November 2011) • July 2012 - Lord Chancellor publishes proposals for reform of judicial pension arrangements. Preferred approach is for judges to join new Civil Service scheme from 2015; includes additional transitional protection for those between 10 and 13.5 years of pension age at April 2012. • February 2013 – Lord Chancellor publishes plans for reform of judicial pensions Links • Lord Hutton’s review: www.hm-treasury.gov.uk/indreview_johnhutton_pensions.htm • Government’s proposals: www.hm-treasury.gov.uk/d/pensions_publicservice_021111.pdf • Civil Service pension reform: www.civilservice.gov.uk/pensions/reform/

4. Judicial pensions– overview of July 2012 proposals In scheme on 1/4/12 and aged at least 55 Carry on in current scheme until retirement Choose to carry on in current scheme for an age-related period beyond April 2015, then join the new Civil Service scheme for future service** In scheme on 1/4/12 and aged between 51½ and 55 Carry on in current scheme until April 2015 and then move into the new Civil Service scheme for future service ** Others in scheme between 1/4/12 and 31/3/15 **Note – earlier service continues to be pensioned under current scheme rules

5. Judicial pensions – summary of plans for reform - February 2013 In scheme on 1/4/12 and aged at least 55 Carry on in current scheme until retirement Carry on in current scheme for an age-related period from April 2015, then move into New Judicial Scheme for future service** In scheme on 1/4/12 and aged between 51½ and 55 Make choice Others in scheme on 1/4/12 and judges whose appointment had been agreed at that date Make choice Carry on in current scheme until 31 March 2015 then, if eligible, opt out and take “transitional protection allowance” in lieu of pension** Carry on in current scheme until 31 March 2015 and then move into New Judicial Scheme for future service** Others in scheme by 31/3/15 **Note – earlier service continues to be pensioned under current scheme rules

6. Proposed New Judicial Scheme – key features • Stand-alone tax-registered scheme with terms “by analogy” to the Civil Service scheme • Pension builds up on a “career average” basis – each year earn pension of 2.32% of that year’s pay • Pension built up in the new scheme increases with Consumer Prices (CPI) in each year before retirement • Scheme has Normal Pension Age (NPA) equivalent to State Pension Age (SPA) • Pension can be drawn before NPA – subject to early retirement reduction • Pension can be drawn after NPA – subject to late retirement enhancement • No limit to years of pensionable service • Lump sum is available as an option on retirement – each £1 of pension given up buys £12 of lump sum. Lump sum is tax-free subject to HMRC limits. • Death-in-service lump sum of 2 times pay – tax free subject to HMRC limits • Pension for widow, widower, civil partner or unmarried partner – based on 3/8ths of individual’s pension calculated before any commutation of pension for lump sum • Medical retirement possible – pension brought into payment without early retirement reduction • Member contributions to mirror those of the Civil Service scheme – still to be finalised but could be 7.35% for most judges and 9% for higher judiciary. Contributions attract tax relief. Remember ~ • Pensionable service in the current Judicial Scheme continues to earn “final salary” pension and lump sum (and “service award”)

7. How does a career average pension work? Increase Pension balance brought forward from previous year Pension earned in year 1 Pension earned in year 2 Pension balance b/f Increase Pension earned in year 1 Pension earned in year 3 Pension earned = pay in year x 2.32% Increase = pension balance b/f x CPI Year 1 Year 2 Year 3

8. What would this mean for me? Eligible for full protection? YES Remain in current scheme NO Eligible for transitional protection allowance? YES Do you want to opt for the allowance? YES Opt out of scheme in April 2015, take allowance instead NO NO Eligible for tapering protection? YES Do you want to remain in your current scheme for as long as possible? Opt to remain in current scheme until your tapering date, then move to new scheme YES NO NO Remain in current scheme until 31 March 2015, then move to new scheme

9. Proposed transitional protection • New Judicial Scheme begins 1 April 2015; applies to both current and new appointments from that date except where transitional protection applies • Broadly consistent approach to transitional protection across public service schemes Proposed full protection – carry on in current scheme • Must be in service at 1 April 2012 and aged at least 55 at that date • Cannot choose to go into new scheme Proposed tapering protection – option to carry on in current scheme until age-related date • Must be in service at 1 April 2012 and aged between 51½ and 55 at that date • Carry on in current scheme for extra 2 months for every full month that you were older than 51½ at 1 April 2012 (see chart on next page, also pension calculator) • Someone just under 55 in April 2012 will move to new scheme in 2022 • Someone just over 51½ in April 2012 will move to new scheme in 2015 • Tapering protection not mandatory – can choose to move to new scheme in 2015

10. Tapering protection – date to new scheme

11. Proposed transitional protection allowance option Who would be eligible? • Judges who were in service or whose appointment had been agreed at 1 April 2012, but not eligible for full protection, and who have • continuous judicial pension scheme membership from appointment until 31 March 2015 • registered with HMRC for Enhanced Protection (EP) or Fixed Protection (FP) and • not made contributions to a tax-registered pension after 5 April 2006 (EP) or 5 April 2012 (FP) What is the option? • Receive allowance in lieu of pension scheme membership, paid via payroll from April 2015. Allowance based on employer contribution to new scheme - initial rate of allowance expected to be around 20% of pay. Allowance is taxable and subject to National Insurance contributions. Current scheme benefits continue to reflect salary etc on retiring and service to 31 March 2015. • Option can only be exercised at April 2015 (even if you would otherwise be eligible for tapering protection) and cannot be reversed Possible Disadvantages Future saving for retirement is down to you Allowance is subject to income tax and National Insurance contributions You will pay National Insurance at the higher, “not contracted-out”, rate Possible Advantages Future saving for retirement is down to you No loss of Enhanced Protection or Fixed Protection Greater flexibility in managing your finances, especially if Annual Allowance and/or Lifetime Allowance could apply You may wish to take financial advice before deciding if this option is for you

12. What contributions would I have to pay? Current scheme • Contributions for personal benefits are currently 1.28% and are expected to increase in April 2013 and in April 2014. Additionally, members pay either 1.8% or 2.4% (depending on scheme) for pension for spouse / civil partner. • In future, contributions are expected to remain at the 2014 level, but could be reviewed if scheme costs increase • Member contributions apply for 20 years (the maximum length of pensionable service) and do not attract tax relief New scheme • Member contribution rates will reflect those of the new Civil Service scheme. These remain to be finalised, but the indicative rates already published are: • Members earning £150,000 or more a year (full-time rate) – 9% of pay • Members earning less than £150,000 a year (full-time rate) – 7.35% of pay • Member contribution levels will remain fixed unless scheme costs increase (or decrease) such that the employer cost cap is breached and scheme terms have to be reviewed • Member contributions apply throughout service (no limits to years of service) and attract income tax relief (tax relief is provided through payroll) • The Ministry of Justice (or other appropriate Department) meets balance of cost of new scheme – contributions expected to be around 23.3% of pay.

13. When to retire • Normal Pension Age (NPA) in new scheme is the same as State Pension • Look up your State Pension Age at https://www.gov.uk/calculate-state-pension • Do not have to retire at NPA – can choose to retire earlier or later • Pension built up in current judicial scheme retains NPA of 65 Example 1 • Judge X retires at age 65 on a salary of £130,000. At that point he has built up 10 years in the 1993 scheme and a pension of £30,000 in the new judicial scheme. Judge X’s NPA in the new scheme is 66. • Judge X’s pension and lump sum under the 1993 scheme, plus his service award, are paid on retirement • Judge X will choose whether to draw his new scheme pension with an early retirement reduction (probably around 5% for retiring one year early) or to defer it until he reaches NPA. Example 2 • Judge Y retires at age 67 on a salary of £130,000. At that point she has built up 10 years in the 1993 scheme and a pension of £30,000 in the new judicial scheme. Judge Y’s NPA in the new scheme is 66. • On retirement, Judge Y receives her new scheme pension plus her pension and lump sum under the 1993 scheme, also her service award. Judge Y’s new scheme pension is increased (probably by around 5% for retiring one year late) as she is retiring after her NPA.

14. What are the implications of a standalone Judicial pension scheme? • The New Judicial Pension Scheme will, in common with other public service pension schemes, operate within the framework set out in the Public Service Pensions Bill • The Lord Chancellor will be responsible for the scheme’s terms and its governance • The scheme must have a Pension Board and an Advisory Board – judges will sit on these boards • The scheme will start life with terms reflecting those of the new Civil Service scheme • The scheme will have its own actuarial valuations • The scheme will have its own “cost cap” reflecting the new scheme terms and the demographics of the judiciary at April 2012 (see following slides) • Protection against scheme terms changing before 2040 is provided for in the Public Service Pensions Bill (see next slide) • Additional protection is provided by the new judicial scheme regulations being made under the affirmative (rather than the negative) procedure. The negative procedure will be used only where the pension board considers that the matters addressed by the regulations are minor or wholly beneficial. Note: the points above assume that the final legislation reflects Government amendments to the Bill introduced at Lords Report stage

15. Can the new scheme change in future? • The Public Service Pensions Bill envisages that certain aspects of the scheme rules will be fixed until April 2040 (subject of course to changes that may become required by law) • The 25-year “no change” will not apply in the following circumstances: • Your State Pension Age is changed – in which case the new pension age will apply to all of your benefits in the new scheme • Scheme costs (as determined at an actuarial valuation) change such that the cost cap conditions are breached. In those circumstances changes must be made to bring the cost back to the cost ceiling level. • Changes to scheme features other than the type of scheme, the pension accrual rate and the member contribution rate • Where, for some other reason, changes are proposed during the 25-year period, then there must be consultation with scheme members and a report must be laid before Parliament.

16. Cost ceiling Employer cost cap and cost ceiling – new scheme • The Public Service Pensions Bill sets an employer cost cap and an employer cost ceiling. For the judiciary the employer is the Ministry of Justice or other appropriate Department • Employer cost ceiling reflects the expected on-going cost of the new scheme after deduction of the member contributions. It will be set following an actuarial valuation using new scheme terms and current scheme membership information at April 2012. • The employer cost cap is expected to be set at the cost ceiling + 2 percentage points. Provided the actual employer cost (as determined at successive actuarial valuations) stays within this band, no action is taken • If costs of the new scheme move outside this band, then the Lord Chancellor, working with the pension board, must take action to bring the employer cost back to the cost ceiling – for instance, by changing member contributions or the level of benefits being provided. Employer cost cap Cost can fluctuate by +/-2 percentage points

17. Tax issues – Lifetime Allowance What is the Lifetime Allowance (LTA)? • The LTA is the total amount of tax-registered pension saving you can build up without paying additional tax. The LTA is currently £1.5m (but you may have a different value if you have a Primary Protection or Fixed Protection certificate issued by HMRC). How are pension values calculated for the LTA? • Money-purchase pensions – total fund value when benefits are “crystallised” (ie drawn) • Defined benefit pensions – retirement pension x 20 plus any lump sum • Benefits drawn before April 2006 – 25 x annual pension value at April 2006 What happens if my benefits exceed the LTA? • LTA tax is payable on the excess benefits. This is charged at 55% if the excess benefits are taken as a lump sum or at 25% if the excess benefits are to be taken as pension. An LTA assessment is done whenever benefits are crystallised. Tax can either be paid in cash or the scheme may pay the tax and reduce pension benefits accordingly How do I know how much LTA I am using up? • When pension benefits are crystallised, your pension provider must give you an LTA certificate showing how much LTA you have used up. Where do I find out more? • Speak to your financial adviser • Look at HMRC’s website www.hmrc.gov.uk/pensionschemes/reliefs-charges.htm

18. Tax issues – Annual Allowance What is the Annual Allowance (AA)? • The AA is the amount of tax-relieved pension saving you are allowed to build up each year without incurring a tax charge. In any tax year your personal AA is the standard AA plus any unused AA you have from the three preceding years. However, you only have an AA in any tax year where you are in a tax-registered pension scheme (but you do not need to be contributing to that scheme) • The AA is currently £50,000. However, the Government plans to reduce the AA to £40,000 from April 2014 How is “pension saving” calculated for the AA? • Money-purchase pensions – total new money invested in year • Defined benefit pensions – real increase over the year x 16. “Real increase” is after allowing for last year’s figure to be increased with prices (CPI). What happens if my pension savings exceed the AA? • Any excess savings are subject to tax through self-assessment. If the tax charge is more than £2,000 you have the right to ask the scheme to pay the tax and to reduce your benefits accordingly. How do I know? • If your pension saving exceeds the current year’s AA, your pension scheme must tell you and provide you with a statement. You will need to determine if you have unused AA from earlier years and provide information to HMRC through self-assessment. Where do I find out more? • Speak to your financial adviser • Look at HMRC’s website www.hmrc.gov.uk/pensionschemes/reliefs-charges.htm

19. Tax issues – Annual Allowance (2) When is the Annual Allowance likely to be an issue? • Annual pension entitlement (defined benefit) routinely going up by more than £2,500 (when AA reduced to £40,000) • Many full-time judiciary likely to be affected in new scheme Example • High Court judge – salary £172,753 • Career average scheme with accrual rate of 2.32% and uprating of CPI • Real-term growth in pension in one year is 2.32% x £172,753 = £4007.87 • Valuation for AA = 16 x £4007.87 = £64,126 • Excess over the AA = Taxable amount = £24,126 (assuming AA = £40,000 and no unused AA to offset) Note • You only get an AA in years when you were in a tax-registered pension scheme • Someone moving from the 1993 scheme to the new scheme, and who had not previously made any contributions into a tax-registered scheme, would not have any AA immediately before 2015 (and so no prospect of unused AA to carry forward). You may wish to discuss this issue with your financial adviser so that you are clear as to your status for AA purposes. • NB The Judicial Additional Voluntary Contributions Schemes are tax-registered schemes

20. Suggested Next Steps • Determine whether you may be eligible for full or tapering protection • Determine if you may be eligible to apply for the transitional protection allowance • Look at the case studies on the following pages. These cover the following examples: 1 Service in 1993 scheme followed by new scheme from 2015 2 Service in 1993 scheme plus tapering protection 3 Service in 1993 scheme – full protection 4 Service in 1993 scheme followed by transitional protection allowance 5 Judge aged 42 in 2012 – service in 1993 scheme and new scheme 6 All service in new scheme • Consider discussing the information in this pack with your financial adviser. If you expect to go into the New Judicial Scheme you should understand the impact of moving into a tax-registered pension, and particularly how the Annual Allowance operates • Remember that you will not be asked to make any pension scheme choices before 2015

21. Case study AJudge aged 50 in 2012 - 1993 scheme followed by new scheme At 1 April 2012, Judge A is aged 50 and has built up 4 years in the 1993 scheme. Judge A is not eligible for the transitional protection allowance. Judge A joins the new scheme in April 2015 and she retires in 2030 at age 68. Judge A’s State Pension Age is 66, so this is her new scheme Normal Pension Age. On retirement, Judge A will receive the following benefits: 1993 scheme Benefits based on service to 2015 (7 years) pension of 7/40 x Judge A’s final salary Lump sum = 2.25 x pension (taxable) Service award (taxable) – 2.25 x 7/40 x the lesser of (a) final salary and (b) Earnings Cap New scheme On retirement, Judge A has 15 years in the new scheme and she will have built up a pension reflecting her salary each year. As Judge A is retiring 2 years later than her Normal Pension Age, her benefits will be increased by a late retirement adjustment (probably around 10%) At the time of retirement, Judge A will choose whether to commute any of her pension for lump sum (tax-free to HMRC limits). Commutation will not affect any pension paid to Judge A’s partner/spouse after her death During Judge A’s membership of the new scheme, she will need to check the increase in her benefits each year against the Annual Allowance and make appropriate returns to HMRC via self-assessment. If Annual Allowance tax of more than £2,000 is payable, Judge A can ask the scheme to pay this on her behalf, and make a deduction from her pension when she retires. On retirement, Judge A’s new scheme benefits will be valued for Lifetime Allowance purposes (Lump sum + 20 x pension brought into payment). If Judge A does not have sufficient Lifetime Allowance available, then tax will be payable. Judge A can either pay the tax upfront, or ask for the scheme to pay and to reduce her pension benefits accordingly.

22. Case study BJudge aged 53 in 2012 - 1993 scheme with tapering protection At 1 April 2012, Judge B is aged 53 and has built up 13 years in the 1993 scheme. Judge B is eligible for the transitional protection allowance in respect of his pre-judicial pension saving, but he decides it is not for him. Judge B is in the tapering protection group. At 1 April 2012 he is 18 months older than 51½, so he has tapering protection of 36 months. This means that he can choose to carry on in the current scheme for three years after the new scheme is introduced (ie until 2018, when he is aged 59 – he then has 19 years in the 1993 scheme). Judge B decides to stay in the current scheme for as long as he can. He then moves to the new scheme and retires at age 66 (his State Pension Age) On retirement, Judge B will receive the following benefits: 1993 scheme Benefits based on service to 2018 (19 years): pension of 19/40 x final salary Lump sum = 2.25 x pension (taxable) Service award (taxable) – 2.25 x 19/40 x the lesser of (a) final salary and (b) Earnings Cap New scheme On retirement, Judge B has 7 years in the new scheme and he will have built up a pension reflecting his salary each year. He will decide, at the time of his retirement, whether to commute any of his pension for a lump sum (tax-free to HMRC limits) See Case Study A for comments re Annual Allowance and Lifetime Allowance tax

23. Case study CJudge aged 56 in 2012 - 1993 scheme with full protection At 1 April 2012, Judge C is aged 56 and has built up 12 years in the 1993 scheme. Judge C qualifies for full protection, so she remains in the current scheme – she cannot join the new scheme Judge C retires at age 68 – she has then been a member of the scheme for 24 years Judge C is not married, but she lives with her partner. On retirement, Judge C will receive the following benefits: 1993 scheme Benefits based on service to retirement, restricted to 20 years: pension of 20/40 x final salary Lump sum = 2.25 x pension (taxable) Service award (taxable) – 2.25 x 20/40 x the lesser of (a) final salary and (b) Earnings Cap Judge C’s partner will not receive a pension if she dies before her.

24. Case study D1993 scheme followed by transitional protection allowance At 1 April 2012, Judge D is aged 50 and has built up 4 years in the 1993 scheme. Judge D has significant pre-judicial pension saving registered with HMRC for Enhanced Protection and he decides to opt for the transitional protection allowance from April 2015. Judge D retires at 66. From April 2015, Judge D will stop building up pension benefits. He will then receive an allowance expected to be around 20% of pay, paid monthly through payroll. The allowance will be subject to income tax and National Insurance contributions. On retirement, Judge D will receive the following benefits 1993 scheme Benefits based on service to April 2015 (7 years): pension of 7/40 x final salary Lump sum = 2.25 x pension (taxable) Service award (taxable) = 2.25 x 7/40 x lesser of (a) final salary and (b) Earnings Cap

25. Case study EJudge aged 42 in 2012 - 1993 scheme followed by new scheme At 1 April 2012, Judge E is aged 42 and has just joined the 1993 scheme. Judge E decides that she is not eligible for the transitional protection allowance. Judge E joins the new scheme in April 2015 and she retires in 2037 at age 67 (her State Pension Age). On retirement, Judge E will receive the following benefits: 1993 scheme Benefits based on service to 2015 (3 years) pension of 3/40 x Judge E’s final salary Lump sum = 2.25 x pension (taxable) Service award (taxable) – 2.25 x 3/40 x the lesser of (a) final salary and (b) Earnings Cap New scheme On retirement, Judge E has 22 years in the new scheme and she will have built up a pension reflecting her salary each year. At the time of retirement, Judge E will choose whether to commute any of her new scheme pension for lump sum (tax-free to HMRC limits). Commutation will not affect any pension paid to Judge E’s partner/spouse after her death See Case Study A for comments re Annual Allowance and Lifetime Allowance tax

26. Case study FNew judge appointed after 2015 Judge F is appointed in 2016, and joins the new scheme. Judge F retires after 25 years’ service, at her State Pension Age Judge F lives with her partner, but they are not married. On retirement, Judge F receives the following benefits: New scheme On retirement, Judge F has 25 years in the new scheme and she will have built up a pension reflecting her salary each year. Judge F will decide, at the time of her retirement, whether to commute any of her pension for a lump sum (tax-free to HMRC limits) If Judge F dies before her partner, he will then receive a pension of 3/8ths of Judge F’s pension (before any adjustment for commutation) See Case Study A for comments re Annual Allowance and Lifetime Allowance tax

27. Planned legislative changes which may affect judges’ pensions State Pension • State Pension Age currently moves to age 67 for those born after March 1969. Government has announced plans to bring this forward to affect those born after March 1961. • Government has announced plans to introduce single tier State pension (possibly from 2017) • Contracting-out will stop when single tier pension is introduced – additional NI contributions will then apply for people (and employers) currently paying the reduced (contracted-out) contributions, but extra State pension entitlement will be earned Lifetime Allowance • Currently £1.5m. Government plans to reduce this to £1.25m from FY 2014-15 Annual Allowance • Currently £50,000. Government plans to reduce this to £40,000 from FY 2014-15