We have come across a few instances of “final pay controls” being applied. It is a complex area, however, the following bullet points will hopefully provide a useful summary of the key points:
- Only applicable to members who have benefits in the 1995 section of the NHS Pension Scheme
- Can be applied when a member receives, within 3 years of retirement, a pay increase which is more than CPI plus 4.5%
- It is not a “fine” – for the employer, it is an additional funding charge and may lead to the employee suffering an excess annual allowance tax charge
- From the employer’s perspective, the charge is designed to cover the higher than expected cost the NHS Pension Scheme will face in providing pension benefits to the member.
- If the employer does not pay the charge promptly, interest and administration levies will start to be applied
- Attached is a factsheet which provides an example showing how the charge is calculated
- From the employee’s perspective, if, as a consequence of receiving high pay increases when close to retirement, they experience a sharp increase in the value of their pension benefits, they may be faced with an additional tax charge. Again, this can be a complex issue, however, as the member should be able to elect to have the tax charge paid by the scheme, resulting in a reduction in benefits, it is difficult to envisage any circumstances where the member will suffer any financial hardship. Indeed, net of tax charges, they are likely to be in a better position than they otherwise would have been had they received pay increases within the allowable amount.