Commutation Review Following Pension Ombudsman Decision

Following the Pensions Ombudsman’s recent Determination on the complaint brought by Mr W Milne, the Government has decided that additional payments are to be made to scheme members whose pension commenced between 1 December 2001 and 21 August 2006 and who chose to commute pension for lump sum at retirement. This is to address the Ombudsman’s conclusion that the scheme’s commutation factors should have been reviewed before 2006.

The Government Actuaries Department (GAD), has prepared two sets of reconstructed commutation factors, which represent the factors that would have been prepared if reviews had been made at 1 December 2001 and at 1 December 2004 respectively.

We have now identified everyone that retired between the relevant dates and is entitled to an additional payment.

The form of additional payment that an individual may be entitled to, will depend on their circumstances at retirement, as can be illustrated be the table below;

Type of member

Form of additional payment

Not subject to maximum commutation amount of 2.25 times annual pension

Lump sum

Subject to maximum commutation amount of 2.25 times annual pension

Additional pension, with backdated arrears of pension paid as a lump sum

Subject to maximum commutation amount of 2.25 times annual pension, original lump sum less than 2.25 times annual pension

 

Member’s option of either:

Lump sum[1]

Or:

Additional pension, with backdated arrears of pension paid as a lump sum.


Government have expressed their expectations that the majority of calculations should be completed by December 2015, and that FRAs will have made the majority of payments by 31 March 2016.
Pensioners affected by this determination will receive individual letters. 
You may have some questions and concerns regarding the payment of interest and tax treatment of these additional payments, and have provided further details below.


[1] If the total lump sum would then exceed the 2.25 times annual pension, then redress will be lump sum up to that limit plus a partial additional pension with backdated arrears of pension paid as a lump sum.

Will individuals be reimbursed through a higher lump sum payment or through higher monthly pension payments? Will they have a choice in this?

Any additional payment will usually take the form of a lump sum.  For some members, a maximum commutation amount of 2.25 times annual pension would have applied under the Firefighters Pension Scheme Order 1992. In such cases, additional payment may be paid as additional pension, with backdated arrears of pension to be paid as a lump sum.

How much interest will individuals be paid?  

The payments to affected individuals will include interest, in recognition of the fact these payments have been delayed by as many as 14 years in some cases. The Pensions Ombudsman has directed interest to be paid at the Bank of England base rate prevailing over the period between retirement and the date of payment of the additional sum, without compounding.

How will this affect my tax?

The tax treatment of any payment will ensure that the individual is put back in the position that they would have been in had they received the correct payments upon retirement. Where no tax would have been due before, the government will meet the costs. Where the individual would have paid tax, they will need to do so now. This will ensure that no one is put in a worse-off position.

(i)            Members not affected by the 2.25 * pension limit

Members not affected by the 2.25 x pension limit 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.

(ii)          Members affected by the 2.25 * pension limit who receive an additional pension only

Members affected by the 2.25 x pension limit, who receive an additional pension, with backdated arrears of pension paid as a lump sum will be taxed on the lump sum that represents past pension instalments and the additional pension through PAYE in the tax year in which they are received.  

Income tax of 20% will be deducted from the lump sum which represents interest on past pension instalments.