Lump sum payment & benefits

chrissy100

Hi,

This is my first post....So, here goes.......

I am 56 in April and not sure of how the following will affect me, or even the best thing to do!?

A pension from a company I used to work for, is now being wound up. It was to be transferred to another scheme similar to the one it was in & continue until my retirement age (64).

I have today received a letter saying that due to the recent downturn in the investment markets. They have reviewed members fund values. My fund value has fallen below the threshold of £16,500 and they are suggesting that I take a winding up lump sum, instead of my previously selected option.

I would need to invest this somewhere. (not sure where yet!). Which means it will no longer be classed as a pension I suppose, but a personal sum of money which I have invested.

As I am on Incapacity benefit & DLA, would this now be classed as an income?

Would the DSS say I have to live off it now, stopping my benefits until it has gone?

Also, the pension company have said that they will deduct tax at a rate of 40% and I would have to reclaim any overpayment of tax on the lump sum. Does anyone know how much of this I would be able to claim back with being on benefits?

I have until the 15th of Feb to let them know my decision.

Hope you have understood my post!! lol

Would appreciate any help or advice please.

Chrissy

MikeJones_2

Hi chrissy100,

First of all you don't have to take the pension fund under triviality rules - you could transfer the fund to another registered pension scheme including a Stakeholder or Personal Pension Plan. You don't have to transfer it to your current employer's existing pension arrangement.

From what you have described your personal circumstances are complicated not least because you are on Incapacity Benefit and whilst it might seem like a 'cop-out' answer, I'd highly recommend you seek the services of an IFA who'll take full account of your overall financial and health situation.

Just for clarification, what type of scheme is the pension that is being would up? Is it a defined benefit scheme (such as a final salary type) or is it a money-purchase scheme?

And who has 'suggested' you take the benefits under triviality rules (as this could be construed as being advice)?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

EdInvestor

chrissy100 wrote: »

I am 56 in April

Pensions cannot normally be taken under triviality rules before the age of 60, though I am not sure how the rules on windups might impact the triviality rule.Is this your only pension (other than state)?

It was to be transferred to another scheme similar to the one it was in & continue until my retirement age (64).

This is presumably still an option and may be a better one as the potential benefits at 64 may be higher than what you can get for the value being offered..

I would need to invest this somewhere. (not sure where yet!). Which means it will no longer be classed as a pension I suppose, but a personal sum of money which I have invested. As I am on Incapacity benefit & DLA, would this now be classed as an income?

I'd have thought it would be classed as savings/capital.

Would the DSS say I have to live off it now, stopping my benefits until it has gone?

No. What type of IB are you on (contributory or income based?) if the former the IB is not means tested.Nor is DLA means tested. So there would be no effect.

If you are on income based IB, this is means tested. IIRC you can have assets/savings of 16k before your benefit is affected.They will assume you are getting an inflated amount of interest from the investment of the money, which could also affect your benefit, but probably not if you have no other income. See the CAB or Age Concern to go through the details.

Also, the pension company have said that they will deduct tax at a rate of 40% and I would have to reclaim any overpayment of tax on the lump sum. Does anyone know how much of this I would be able to claim back with being on benefits?

25% of it is tax free, so assuming the value is 16k, that's 4k. So you would be due to pay tax on 12k.However you have a personal tax allowance of c.6k.So that reduces the taxable amount to 6k, on which you would pay 1,200 in tax at basic rate of 20%.So if they deduct at 40%, that would be 4,800 and you would be due a refund of 3,600.

MikeJones_2

Hi EdInvestor,

EdInvestor wrote: »

Pensions cannot normally be taken under triviality rules before the age of 60, though I am not sure how the rules on windups might impact the triviality rule.Is this your only pension (other than state)?

From HMRC Manual (RPSM09105110 - Technical Pages: Member benefits: Lump sums: Winding-up lump sum):

'Where an occupational pension scheme is being wound up and the member’s benefit rights are commuted to a lump sum payment, that may qualify for tax treatment as a winding-up lump sum provided the conditions set out below are satisfied. Unlike the payment of a trivial commutation lump sum which cannot be paid before the member reaches age 60, there is no lower age limit for payment of a winding-up lump sum.'

Mike

chrissy100

MikeJones wrote: »

Hi chrissy100,

First of all you don't have to take the pension fund under triviality rules - you could transfer the fund to another registered pension scheme including a Stakeholder or Personal Pension Plan. You don't have to transfer it to your current employer's existing pension arrangement.

From what you have described your personal circumstances are complicated not least because you are on Incapacity Benefit and whilst it might seem like a 'cop-out' answer, I'd highly recommend you seek the services of an IFA who'll take full account of your overall financial and health situation.

Just for clarification, what type of scheme is the pension that is being would up? Is it a defined benefit scheme (such as a final salary type) or is it a money-purchase scheme?

And who has 'suggested' you take the benefits under triviality rules (as this could be construed as being advice)?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Hi Mike,

Thanks for your reply. The pension is a money purchase scheme. It is the pension from a company I was made redundant from 3 years ago.

It is the pension company KPMG that has suggested the wind up lump sum.

Chrissy

chrissy100

EdInvestor wrote: »

Pensions cannot normally be taken under triviality rules before the age of 60, though I am not sure how the rules on windups might impact the triviality rule.Is this your only pension (other than state)?

Yes, this is my only pension. I have been told that under certain circumstances a lump sum can be taken at the age of 55 and over.


This is presumably still an option and may be a better one as the potential benefits at 64 may be higher than what you can get for the value being offered..


I am worried about choosing the right thing to do with the money, in case of I end up loosing the capital.


I'd have thought it would be classed as savings/capital.

I thought it would be classed as savings/capital.


No. What type of IB are you on (contributory or income based?) if the former the IB is not means tested.Nor is DLA means tested. So there would be no effect.

If you are on income based IB, this is means tested. IIRC you can have assets/savings of 16k before your benefit is affected.They will assume you are getting an inflated amount of interest from the investment of the money, which could also affect your benefit, but probably not if you have no other income. See the CAB or Age Concern to go through the details.


I am pretty sure I am on Income based IB.


25% of it is tax free, so assuming the value is 16k, that's 4k. So you would be due to pay tax on 12k.However you have a personal tax allowance of c.6k.So that reduces the taxable amount to 6k, on which you would pay 1,200 in tax at basic rate of 20%.So if they deduct at 40%, that would be 4,800 and you would be due a refund of 3,600.

Thanks for the explaination of the tax. I understand that now.

Many thanks
Chrissy

chrissy100

MikeJones wrote: »

Hi EdInvestor,



From HMRC Manual (RPSM09105110 - Technical Pages: Member benefits: Lump sums: Winding-up lump sum):

'Where an occupational pension scheme is being wound up and the member’s benefit rights are commuted to a lump sum payment, that may qualify for tax treatment as a winding-up lump sum provided the conditions set out below are satisfied. Unlike the payment of a trivial commutation lump sum which cannot be paid before the member reaches age 60, there is no lower age limit for payment of a winding-up lump sum.'

Mike

I have been sent a HMRC document. Appendix A - Winding up lump sum.

Which says:

In certain circumstances, HMRC allows members to take all their benefits as a one-off lump sum payment. This is known as a wiwnding up lump sum.

The criteria to satisfy in order to be eligible for this option are:

• The total gross value of your fund must be less than 1% of the Standard Lifetime Allowance (i.e. currently £16,500) at the time of settlement.

• You are not receiving any contributions into a registered pension scheme from an Employer associated with the scheme.

• The lump sum extinguishes all liability from the Scheme.

• You are under age 75.

That is just the criteria, there is a full page of other imfo.

To be truthfull, the more I read the documents sent I get more confused!

Many thanks
Chrissy