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Tax treatment of compulsorily wound up pensions
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bunking_off
Posts: 1,264 Forumite
in Cutting tax
Apologies if this is the wrong forum : not sure if this should go in pensions or tax.
It's possible that I'm getting half a tale on this, but I wonder if anyone could shed any light on the proper tax treatment of payments made when a pension scheme is compulsorily wound up?
Background is that the occupational scheme of a (long gone) local employer has been failing for sometime, and the decision has now been made by the administrators to wind up the scheme and make a lump sum payment to members in leiu of future monthly pension payments. My f-in-law is affected but has yet to have his letter, but by way of example a friend of theirs who was receiving c£40/month pension has been given a lump sum of c£7k.
The thing is, because it's been paid as a lump sum, they've had tax deducted at 25%, whereas if it was paid out at £480/yr over the next N years, chances are they wouldn't have fallen above the basic tax threshold. Obviously there's the prospect of getting some of the tax back because a lump sum received early in the tax year will be treated more harshly than at year end, but is there any scheme to allow payments in such circumstances to be treated more leniently from a tax standpoint? It seems perverse that by receiving the benefit as a lump sum (compulsory, no choice in the matter), defacto they lose their tax allowance for the coming years.
A quick google indicates it may be possible to get some relief under the same sort of rules as the trivial pensions scheme, but that only seems to cover 25% of the lump sum rather than whole. Also, in trivial pensions there's a degree of exercise of choice by the recipient, but in this case the members have simply been told this is what will happen.
Anyone have any experience of this?
It's possible that I'm getting half a tale on this, but I wonder if anyone could shed any light on the proper tax treatment of payments made when a pension scheme is compulsorily wound up?
Background is that the occupational scheme of a (long gone) local employer has been failing for sometime, and the decision has now been made by the administrators to wind up the scheme and make a lump sum payment to members in leiu of future monthly pension payments. My f-in-law is affected but has yet to have his letter, but by way of example a friend of theirs who was receiving c£40/month pension has been given a lump sum of c£7k.
The thing is, because it's been paid as a lump sum, they've had tax deducted at 25%, whereas if it was paid out at £480/yr over the next N years, chances are they wouldn't have fallen above the basic tax threshold. Obviously there's the prospect of getting some of the tax back because a lump sum received early in the tax year will be treated more harshly than at year end, but is there any scheme to allow payments in such circumstances to be treated more leniently from a tax standpoint? It seems perverse that by receiving the benefit as a lump sum (compulsory, no choice in the matter), defacto they lose their tax allowance for the coming years.
A quick google indicates it may be possible to get some relief under the same sort of rules as the trivial pensions scheme, but that only seems to cover 25% of the lump sum rather than whole. Also, in trivial pensions there's a degree of exercise of choice by the recipient, but in this case the members have simply been told this is what will happen.
Anyone have any experience of this?
I really must stop loafing and get back to work...
0
Comments
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I would have thought they would at least be given the choice of a transfer value tax free or a winding up lump sum of which 25% would be tax free. There are other options available. I very much doubt that they would have no options, I do not think that would be legal.0
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