Pension Schemes - Frequently Asked Questions

 

Retirement Benefits

Occupational Schemes

Q. What are the maximum retirement benefits the Inland Revenue will allow me to take from my pension scheme at Normal Retirement Date?

A. The calculation of your retirement benefits is governed by a number of factors including length of service with the employer, your final remuneration, Inland Revenue requirements, and, most importantly, the rules of your scheme. Only the scheme administrator will know all the facts relating to the calculation of a member's retirement benefits.

General guidance relating to Inland Revenue restrictions on the maximum retirement benefits that can be provided from Occupational Pension Schemes can be found in chapters 6 - 8 of the booklet Occupational Pension Schemes a Guide for Members of Tax Approved Schemes and chapters 7 & 8 of Practice Notes IR12 (2001) both of which are contained on this website. It should be remembered when reading these publications that most occupational pension schemes will provide benefits that are below the maximum allowable.


Q. What is the Earnings Cap (Permitted Maximum)?

A. For Finance Act 1989 regime members only, the final remuneration that can be used for calculating benefits is capped at an amount set yearly by parliament. The limit for the year ended 5 April 2002 is £95,400 and £97,200 for the tax year2002/03. Earnings in excess of this amount cannot be pensioned through a tax approved scheme.

Q. What is the limit for commutation of trivial pensions?

A. Commutation of trivial pensions is permitted to save life offices and fund managers the expense of recurring small payments. If the aggregate of total benefits payable to the employee under all schemes providing benefits in respect of their employment does not exceed the value of a pension of £260 per annum, then the pensions, including any arising from the payment of voluntary contributions (including Free-standing Additional Voluntary Contributions) may be commuted.


Q. Why doesn't the Inland Revenue let me have the increases on my pension promised by my pension provider?

A. The Revenue limits the amount by which a maximum pension can increase annually to a rate equal to the rise in the retail prices index or 3% whichever is greater. This is because the reason for having increases on pensions in payment is to allow them to keep pace with inflation and maintain their purchasing power. This is not new practice and pension providers should be able to explain these Revenue restrictions to all members.


Q. My client left service a few years ago. He has had his benefits assigned to him but has not taken any yet. Can he opt for the post 89 regime as this will be beneficial to him?

A. No, the option to be treated as a post Finance Act 89 member has to be exercised not only before benefits come into payment, but also before any funds are transferred outside of the employer's scheme. An assignment is a form of transfer. As the policy has already been assigned to the member, it is therefore too late for him to choose to be treated as a post 89 member.


Q. My client is a director who hasn't reached his / her normal retirement date. However, they want to retire early and take benefits. Do they have to give up their directorship and shareholding?

A. To take benefits early a director must genuinely leave service, this means resigning as a director. Shares may be retained provided no part is played by the former member in the running of the company.

Q. I am retired and drawing retirement benefits from my former employer's pension scheme. I have now been awarded back-dated membership of the scheme in respect of part-time service with my former employer which previously had not been pensionable under the scheme's rules. Can I take part of the resulting retirement benefits as a tax-free lump sum?

A. Yes - but only if you commuted part of your original pension for a tax-free lump sum and the scheme rules allow an additional tax-free lump sum to be paid in circumstances such as yours. Or, if the rules of your former employer's pension scheme provide a separate tax-free lump sum (normally calculated as 3/80ths of pensionable salary for each year of service) as well as a pension, you will automatically receive a further tax-free lump sum.

Personal Pensions

Q. I am currently experiencing severe financial hardship. Can I have the money back from my personal pension/stakeholder fund to pay off my debts?

A. No. Your pension fund is intended to provide you with benefits when you retire and cannot be accessed before you reach age 50. Even then, the fund must be paid out mainly in the form of pension benefits (you may take 25% as a tax-free lump sum). The fund and your contributions have enjoyed generous tax reliefs and, because of this, you cannot simply withdraw the money in the same way that you can from a savings account, even if you are prepared to pay back the tax relief given on your contributions.


Q. Why haven't I got the 25% lump sum from my personal pension that I was expecting?

A. If your personal pension fund contained an amount that had been transferred in from an occupational pension scheme and you were over 45, a director or a high earner at the time of the transfer, the transferred amount would have had to be certified. The certificate restricts the amount of the lump sum from the transfer payment to the amount that you could have expected from the occupational pension scheme.

Q. The published list of occupations whereby benefits from a retirement annuity contract may be taken before the usual age of 60 includes an entry for ITN Newscasters. This permits benefits to be taken from age 50. Can other newsreaders for other television companies take advantage of this also?

A. Yes. We no longer make any distinction between the various television companies in this regard. We have advised the Association of British Insurers accordingly.


Public Sector Schemes

Q. I am in the Police Pension scheme. When can I retire with full pension?

A. There is no normal retirement age (NRA) as such in the police scheme. There are a variety of compulsory retirement ages (55 for officers from Constable to Chief Superintendent, 57 for Deputy Assistant Commissioners and 60 for Assistant Commissioners) but this is not the same as an NRA. An officer can retire with full pension on completion of 30 years service - regardless of the age at which they attain this.


Q. What is the current earnings cap?

A. The limit for the year ended 5 April 2002 is £95,400 and £97,200 for the tax year 2002/03. This applies to everyone in the public sector except Dentists. They have their salary "capped" by the NHS Regulations at a lower level than the general cap. For 2002/2003 it is £94,400.


Q. I am about to retire from my present job. I have been told that the benefits I am receiving from my previous job must be taken into account by my current employer before they can pay me any benefits. Is this true?

A. Yes. Benefits from previous employments, whether under occupational pension schemes, personal pensions or retirement annuity contracts are known as "retained benefits". Any retained benefits (whether deferred or in payment) have to be taken into account so that, taken together, the overall pension benefits do not exceed 2/3rds of final salary.

There are, however, two situations in which retained benefits can be ignored. Firstly, if the total benefits from the final scheme represent a rate of accrual no greater than 1/60th per year any retained benefits can be ignored. (But remember that in a scheme offering total benefits of 1/60th or less, the payment of additional voluntary contributions by the member might effectively take the accrual rate above 60ths and mean retained benefits would have to be taken into account.)

The second concession arises from a relaxation in the tax rules in August 1991. If a member joined their scheme after that date and their pay in the first year of membership was less than ¼ of the earnings cap at that time, then any retained benefits can be ignored. This remains the case even if the member subsequently pays additional contributions.


Q. I work for a Local Authority and I am a member of the Local Government Pension Scheme (LGPS). What is my normal retirement age (NRA)?

A. That depends. If you joined the scheme after 1.4.98 your NRA is 65. If you joined before that date there is a variable NRA ranging between 60 and 65 as shown below:

  • age 60 if the member has 25 or more years service at that date
  • age 60-65 when the member attains 25 years service
  • age 65 if the member has less than 25 years service

Q. I work for a parish council. We want to pay a tax-free gratuity to one of our employees. What do we have to do?

A. You need to put your request in writing to the Savings, Pensions and Share Schemes (SPSS) stating the date that the gratuity (retirement, including ill health, or death in service) will be calculated and paid in accordance with Part VI of the Local Government (Discretionary Payments) Regulations 1996. Basically this means that the formula of Final Remuneration x 3/80 x number of years service will be used. Before approval is given, the SPSS will need to see a council resolution passed at a committee meeting (a copy of the council minutes will suffice).

The gratuity is usually paid as a lump sum, but can be paid as an annuity, or a combination of both. Once approval has been granted a lump sum gratuity will be tax free, but annuity payments would be taxable. If 5% is mentioned in any formula (this was the rate pre-1996) the gratuity lump sum would be taxable as we cannot approve the scheme.

It is also possible to have redundancy gratuities but we cannot approve these and they will be taxable.

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