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Pension Ombudsman Determination PO1327 – Milne vs Government Actuary's Department

Pension Ombudsman Determination PO1327 – Milne vs Government Actuary's Department
 
Frequently asked Questions

Will payment be made by lump sum or through higher pension payments?

For most individuals,  additional payment will usually take the form of a lump sum. The payment will include interest from your retirement date to the payment date.  You will not be liable for tax on the additional payment, and will not need to include the lump sum on a self-assessment tax return.

For some members, a maximum commutation amount of 2.25 times your annual pension would have applied under the Firefighters' Pension Scheme (Scotland) 1992 and the Police Pension Scheme (Scotland) 1987. In such cases, payments will be made as additional pension, with backdated arrears of pension to be paid as a lump sum.  Where you would have paid tax on your pension, you will need to do so now.  Income tax will also be deducted from the proportion of lump sum that represents interest on arrears of past pension.

 

How much interest will I be paid?

The payments will include interest, in recognition of the fact that payments have been delayed.  The Pensions Ombudsman has directed interest is to be paid at the base rate prevailing over the period between retirement and the date of payment of the additional sum.

 

How can I tell if my lump sum was subject to 2.25 times annual pension?

A maximum commutation amount of 2.25 times annual pension would have applied to members who retired under regulation B7 paragraph 5 of the Firefighters Pension Scheme (Scotland) Order 1992 or B7 paragraph 4(b) of the Police Pension Schemes (Scotland) 1987.

For Firefighters, those who:

    • retired with an ordinary pension at age 50 or over; and
    • with 25 or more years of pensionable service but less than 30; and
    • before age 55, or before age 60 in the case of Additional Divisional Office and ranks above retiring before 21 November 2005.

For Police Officers, those who:

    • retired with an ordinary pension at age 50 or over; and
    • with 25 or more years of pensionable service but less than 30; and
    • before reaching their compulsory retirement age (under regulation A18) for retirements before 1 October 2006*; or
    • before voluntary retirement age, or if the member does not have a voluntary retirement age then age 65 for retirements on or after 1 October 2006.

*except in the case of a chief constable forced to retire in the interests of efficiency.

And for pension credit members, who are all subject to a maximum commutation limit amount of 2.25 times annual pension.

 

How was my lump sum calculated?

Your payment was calculated using a calculator provided by the Government Actuary's Department (GAD).  GAD prepared reconstructed commutation factors which were used to calculate a notional amount which should have been payable at your retirement date.  The amount you received at retirement was then deducted from the notional amount, and interest was added from your retirement date to the payment date.

For example, for a member who retired at age 50:

Original commutation factor: 15.00
Pension before commutation:  £30,000.00
Maximum amount available to commute: 25% of £30,000 i.e. £7,500
Lump sum £7,500 x 15.00 = £112,500
Reconstructed commutation factor: 17.00
Reconstructed Lump sum £7,500 x 17.00 = £127,500
Redress payment = (£127,500 - £112,500) + interest from retiral date to payment date i.e. £15,000 + interest
 
 

How was my additional pension calculated?

As above, your payment was calculated using the calculator provided by GAD.  GAD prepared reconstructed commutation factors which were used to calculate a notional amount which should have been payable at your retirement date.  As you had already commuted the maximum amount possible at retirement you are, instead, entitled to extra pension with arrears of pension paid as a lump sum.

For example, for a member who retired at age 50 with between 25 and 30 years' service:

Original commutation factor: 15.00
Pension before commutation:  £30,000.00
Maximum lump sum available: 2.25 x £30,000 = £67,500
Maximum amount available to commute: £67,500/15.00 = £4,500
Original reduced pension: £30,000 - £4,500 = £25,500
Reconstructed commutation factor: 17.00
Reconstructed amount available to commute: £67,500/17.00 = £3,970.59
Reconstructed reduced pension: £30,000 - £3,970.59 = £26,029.41
Extra annual pension from retirement date: £26,029.41-£25,000 = £1,029.41
(Tax is deducted from this amount and interest is added to the payment date)

 

Tax Treatment if you are entitled to additional pension and a lump sum of arrears of pension

The lump sum, which represents past pension instalments, and the pension payments will be taxed through PAYE in the tax year in which they are received. Income tax at the rate of 20% has been deducted from the lump sum element which represents interest on past pension instalments.  You will be responsible for paying any higher rate tax due on this amount.  If you already submit a self-assessment return, you should include this interest on your return for the tax year you received the interest.

If you do not already submit a self- assessment return, and your additional income which is wholly untaxed is less than £2,500, or if your gross taxed interest is under £10,000, you can contact HMRC  and ask for your tax code to be adjusted to collect the further tax due. Otherwise, you will need to register for self- assessment and include this interest on your return for the tax year you received the interest.

Please call:      0300 200 3300

or write to

Pay As You Earn,
HM Revenue and Customs,
BX9 1AS,
United Kingdom
(please quote your National Insurance number)

Including all the past pension instalments in your taxable income for the tax year of payment may have taken you into a higher income tax rate than would have been the case if the correct amount of pension had been in payment every year from retirement. If you believe that your tax bill would have been less had each year's pension instalments been treated as received in the year they were due, you can ask HMRC to do this.

You should contact HMRC, using the details above, and ask for the payments to be taxed on the 'accruals' basis.  If you are unsure about whether to do this you should seek independent financial advice.  A table representing a breakdown of the arrears of pension by tax year is included in your advisory letter for your information.  

Members who retired after 5th April 2006 will be provided with a revised Lifetime Allowance certificate.

Link to Scottish Government Website