**Utterly, completely, totally lost. HMRC rules help appreciated!**

hybernia

Hello all. Sorry to be a nuisance but I really am lost, so help would be appreciated. Apologies in advance for the length of this post . . .

My husband changed jobs quite a lot in his career so has finished up with four private pensions in addition to his State pension. One of those pensions relates to a scheme of which he was a member in the late 1980s. That scheme / fund was eventually taken over by Rexam, a well-regarded (I believe) pensions management specialist.

Husband didn't even know he had that pension until late 2009, when Rexam somehow managed to locate us and advise of its existence. Rexam said he could have the pension then rather than wait until he was 65. Two options were offered, one of them a tempting £92.90 per month / £1,14.80 pa arrangement plus a tax-free "Pension Commencement Lump Sum" of £7,432. Hubbie took that. Rexam said "this represents 1.79% of your Lifetime Allowance".

Fast forward to December 30th last, and we received another letter from Rexam:

"Following a change in the law earlier this year, HM Revenue & Customs (HMRC) allow us to offer you a single lump sum payment in full and final settlement of your benefits from the Rexam Plan. This ability to exchange your pension for a single lump sum payment is sometimes known as 'full commutation' and recognises that some people may prefer to have a one-off cash lump sum rather than continue receiving a modest pension. Payment is, however, subject to certain HMRC qualifying requirements being satisfied."

Currently, hubbie's Rexam pension is £1,207 gross. £241 is taken in income tax. (Hubbie is a Basic Rate taxpayer.) The net is therefore £966 pa / £80.50 per month. It will continue to be paid to my husband for the rest of his life.

Rexam now advise that the gross single lump payment available "in full settlement" would be £25,400. (This sum, says Rexam, "will be taxed using the tax code that we currently hold for you".) If husband wishes to exchange that pension for a single lump sum then he must let Rexam know by January 23.

We're not daft so no, we wouldn't rush out and spend whatever the after-tax amount might be. It'd likely go into an ISA -- or at least, £15k of that to keep within our limit. But it is tempting to take this payment if only because this present £80 a month net payment is for his life. Not mine. The pension ceases on his death. There is no widow's pension / widow's benefit. He's now fast approaching 69 and in excellent health but neither of us have a crystal ball. Put it like this:

Ten years from now he'll be nearly 80. (Ye gods!) In that 10 year period, assuming tax rates / personal allowance as they are at present, we will have received a total of £9,700. Twenty years from now, when he's nearly 90, we will have received, in total, £19,400. Should we gamble, today, that his lifespan will stretch that far? (Sorry if all this sounds a bit cynical, but we're trying to wrestle with cold, hard fact here. And no: we're not actuaries.)

We therefore think that taking "his" £25,400 (less tax) makes sense. Or are we misguided??

That, however, is only the start of the headaches. The form he has to fill in is baffling. There are questions about other pensions and dates and "capital values" which we simply do not understand. Worse, if he wishes to even register his interest in taking this lump sum, he has to fill in a declaration which defeats our combined (addled) brains, viz:

"I understand and confirm that the total Capital Value of my benefits from all UK registered pension arrangements, using the HMRC basis, does not exceed £30,000." Eh??

"If I have benefits from other UK registered pension arrangements, any other single lump sum payments in respect of these benefits must be paid to me within the same 12 month period as payment of this Rexam single lump sum payment". Again: eh???

Hubbie has not been contacted by any other provider so isn't going to be taking any "lump sum" in the next 12 months. Hubbie isn't going to receive another pension from any source, either. Hubbie has never been advised by any provider other than Rexam of his "capital benefits".

His four private pensions range from one which exceeds his State pension (and which we'd never want to cash in, even if we could), a slightly lesser one to that (again, we wouldn't want to cash that in, either) and a really tiny one we bought ourselves on the advice of Hargreaves Lansdown when we took the proceeds of the primary employment pension fund and instead of buying an annuity from that provider (Standard Life) bought a considerably superior one, for the exact same amount, from Canada Life. Finally, there's this Rexam pension of £80 a month net . . .

Where we're totally and utterly confused is over this "HMRC basis" as mentioned above:

"For the purposes of assessing the Capital Value of pension benefits against the £30,000 limit the annual pension at 5th April 2006 is multiplied by a factor of 25. So a pension of £500 a year has a Capital Value of £12k,500. Where payment of the pension commenced after 5th April 2006 the original pension is multiplied by a factor of 20 and the tax free lump sum paid at the time is added to the value. So an original pension of £500 a year and tax free lump sum of £3,000 gas a Capital Value of £13,000."

Oh dear. Totally lost. As noted, we had that £7,432 from Rexam itself in 2009. It presumably knows that?? We also had a lump sum from the primary pension fund but can't remember now how much or even when, though it was possibly around 2004. Is it critical that we find this out???

Sorry for the length of this post but these HMRC rules, as spelt out by Rexam, are bewildering and the math involved, mystifying. We don't understand pensions -- at all -- and now, we don't even know if hubbie is in any position to even tell Rexam that yes, we'd be interested in this "full commutation".

We're especially baffled over this "lifetime" thing, because as will be seen, hubbie took a cash sum of £7,432 from the Rexam pension in 2009 and was told it represented 1.79% of his "total allowance". By my math, that must mean he has 98% of that same allowance to go -- so how does this "maximum" £30,000 fit into it all????

Advice on what we ought to be doing here would be greatly valued. Thanks.

kidmugsy

hybernia wrote: »

"Following a change in the law earlier this year, HM Revenue & Customs (HMRC) allow us to offer you a single lump sum payment in full and final settlement of your benefits from the Rexam Plan. This ability to exchange your pension for a single lump sum payment is sometimes known as 'full commutation' and recognises that some people may prefer to have a one-off cash lump sum rather than continue receiving a modest pension. Payment is, however, subject to certain HMRC qualifying requirements being satisfied."

I'll let people who know more than me tell you about the technical stuff. But I will suggest a good use for the lump sum if you finally do take it. Consider the possibility of one or both of you deferring your State Retirement Pension for a year or two, living off the lump sum in the meantime. That deferral pays off as 10.4% extra state pension for each year of deferral, which will (in all probability) be about twice the size of the Rexam pension you'll have given up in exchange for the lump sum. Yippee!!

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

Is there a catch? Well, the index-linking of the extra pension is (currently) to CPI: the Rexam one may have better. Politicians may change things retrospectively. But a two-fold increase compensates for an awful lot of risk, and note that the extra pension is heritable. (My wife will inherit 90% of mine when I shuffle off, by my calculation.)

P.S. If, as I suspect, your husband already has too much pension money coming in to make him qualified for this Rexam stunt, it's still worth considering the pension deferral business if you have enough capital, or income from other sources, to live off during the deferral.

Triumph13

I'm afraid the simple answer is going to be 'no you can't'.


Rexam don't know about your husband's other pensions. You can only do this kind of trivial cashing in (at present) if the total value of ALL your pensions is below £30,000. By your description he is going to be well over this - multiply the amount of the annual pensions, excluding state pension, by 20 to get the values.


It's possible in the future he may be able to sell the annuity on the second hand annuity market Mr Webb would like to create, but for now I'm afraid the only option is to keep taking the regular payments and concentrate on living long enough to get your money's worth!

xylophone

http://www.litrg.org.uk/tax-guides/pensioners-tax/how-do-i-cash-in-my-small-pension-trivial-commutation

See the example of "Mel" in the above?

What is the capital value of your husband's other pension schemes?

atush

It doesn't sound too shabby esp with no widows pension, but would 25400 put him into HRTax? If not the payout would be just over 20K. All of which could go into a S&S isa, as you could put in 10K each?

I guess it depends on his health and personal LE. How old were his parents before they passed?

Does the 80 a month help you life the life you want? Or is it surplus to requirements?

Do you have any pensions in your own name?

hybernia

Dear Gang (if you'll excuse me calling you that):

Some quick answers first, if that's all right; I've already thanked each poster individually:

@ kidmugsy: Many thanks but also many apologies, I should've made it clearer in my OP that Hubbie has been in receipt of State pension since his 65th birthday and I've been in receipt of State pension since my 60th. He's now 69. I'm now 64;

@ Triumph13: Big thanks for the clarity. I'll return to your comment in a mo';

@ xylophone: Ditto -- that link you so kindly provided is a true eye-opener. Back in a minute;

@ atush: And, as before, sincere thanks. Re your entirely sensible questions:

(i) nope, the Higher Rate tax band doesn't come into play. Taking the Rexam lump sum would involve taxation before payment at the standard rate -- i.e., the rate he's currently at;

(ii) his longevity is, I guess, crystal-ball stuff; his mother died at the age of 80, his father at the age of 70; actuarially (if that's such a word) his prospects of living to the age of, let's say, 95 (by which time the £25,000 capital value of his Rexam fund would have presumably diminished to zero) are probably remote seeing as how he was a 60, then 40, then 20-a-day cigarette smoker until two years ago when he quit, albeit his health is currently 100% perfect and his doctor said at the last check-up that "on these current stats, you'll live forever". Nice doctor ;

(iii) the £80 a month is, I guess, a 'negotiable' in that we don't depend on it to exist, hence our current musings about whether to keep it going or cash it in (a debate that in view of Triumph and Xylophone's posts now looks entirely academic);

(iv) I have no pensions at all other than my State pension; if hubbie was, um, overwhelmed by mortality, all his existing pension income would immediately end. I would have to sell our existing home and down-size.

Hope that clarifies my OP. As to the much appreciated instant help provided by you four -- and yes: it is GREATLY appreciated -- kidmugsy's and Triumph's surmise that hubbie is waaaaay over the £30k HMRC limit are clearly well-founded, because xylophone's superb link has taken me straight to Mel and Kim, and -- to me -- these revelatory chunks of text:

Kim
Kim, age 62, has pensions not yet in payment under three registered pension schemes A, B and C, where the policies are worth £3,000, £2,500 and £4,000 respectively. Kim is not in receipt of any pension in payment;

Mel Mel, who is 64 in the tax year 2014/15, has pensions not yet in payment from schemes X, Y and Z with capital values of £5,000, £2,100 and £3,000 respectively (£10,000 in total) on 5 January 2013.

Ye gods. HMRC is talking about Kim's total pension value of £9,500 and Mel's total pension value of £10,100. It's only when I get to Mel's actual payments that some semblance of clarity finally appears (so thanks again to xylophone for pointing out "Mel" -- who I actually thought was a bloke, but apparently, HMRC thinks differently):

She (Mel) also receives a pension of £1,000 from scheme W, which started in the 2011/12 tax year. At the time the scheme pension started Mel was also paid a tax free lump sum of £2,400.
Her pension rights from scheme W are valued at £22,400 (20 times £1,000 plus £2,400).

So. There we are. Mel gets £1,000 a year from that scheme. HMRC therefore values her rights at £22,400. On which basis, God alone knows what HMRC would make of hubbie's two main schemes which together pay more in one month than Mel gets in 12 months from her £22,400 "pot".

(Thinking about it, that means hubbie's "rights" are likely to be valued by HMRC at a level that has to be at least 12 times Mel's £22,400: £268,800 -- a total which certainly gives Triumph's "You can only do this kind of trivial cashing in (at present) if the total value of ALL your pensions is below £30,000. By your description he is going to be well over this" a delicious flavour of purest understatement . . .

Many, many thanks then, to all of you. Hubbie and I are just an ordinary couple who went through life without even thinking very much about pensions. (God: weren't we the lucky ones then? And we know it.) Now that we're at this age, we're realising that we still don't understand pensions at all.

What is beginning to dawn, however, is that all these rule changes about "cashing in" pose questions far beyond the merely financial. Both hubbie and I are therefore incredibly grateful to everyone here not only for their help with our own situation but also for spurring us into belated comprehension of what's now happening in the world of pensions UK, where entirely unnecessary risks to the financial health of future generations appear to be being created by the shabby political opportunism of this one. Grrrr.

:(:(

mgdavid

You can stop receiving and defer State pension even after you've been taking it for a while.

kidmugsy

mgdavid wrote: »

You can stop receiving and defer State pension even after you've been taking it for a while.

Yep, and it mighty be particularly good value for the younger of the couple, because the reward would be received (on average) for more years.

kidmugsy

hybernia, if your husband has enough money coming in for you two to be reasonably comfortable, but your own pension provision is poor, another possibility to consider is for him to take out a life insurance "whole of life" policy, which will pay out to you if he dies first. If you do decide to investigate this, be sure to insist on a policy for which the subscriptions are fixed - it's far too risky to leave the company with the option of raising the subscriptions later. Meantime, do look at my pension deferral link: two or three years of deferral for you (as the younger), if you could afford it, may well be better value than an ISA.

One other thing; your husband might consider, say, a year or so of deferral too. If so, he should find out whether deferring, and reporting it to his DB pension scheme, could result in his getting a bigger DB pension during the deferral. I say this because, for arcane reasons that I have understood only fleetingly and imperfectly, that's what happened to me.

P.S. And of course, if you have money enough, you could open a personal pension for yourself, and contribute up to an annual £2880 net (=£3600 gross). Then when you withdraw income from it you may find yourself paying no income tax on it, if your personal allowance exceeds your annual income.

jamesd

As you've now concluded, you can't accept the Rexam offer because your husband's other private pensions are worth too much, 20 times the amount he gets from them each year. That plus the Rexam amount has to be no more than £30,000 to accept the triviality payment that Rexam are offering. I'm not entirely certain that it is 20 times at his age but if he's getting a pension close to the state pension in size there's no chance of him qualifying for triviality.

If it was lawful to accept the Rexam payment, it would be a good idea to take it and have him, you or both defer your state pensions if you're in normal good health. Life expectancy for those in normal good health is to high 80s for those of your ages.

As others have mentioned, you can defer the state pension once even after claiming it. Because it provides a 10.4% increase for each year of deferral, pro-rated for shorter times, it's a very good way to increase guaranteed income and some of the gain is inheritable by a spouse. It's well worth investigating this if you have lump sums of money available and some desire to increase incomes.

Of the two of you, deferring for you offers a better deal than for him long term because he's older and the increase doesn't change with age. Assuming that you have the same health/ life expectancy that means he'd get the money for less years. Deferring for him for a year or even two would still on average be a good deal if his health is OK. More can be OK, it depends on his life expectancy. For women in normal good health deferring for 3 years has a high chance of making an overall profit. In both cases it's good live a long time insurance since it's paid for life.

The lifetime allowance is used to tax those who receive more than £1.25 million of pension payments during their life. The amount used each time is calculated as a percentage of that and each time you or your husband got an initial pension payment you'd have been notified of the percentage used by that pension. It's your responsibility to add those percentages up and notify HMRC if they go over 100% so you can pay the extra tax. Well, his in this case. It's done in percentages because the lifetime allowance has been higher and lower in the past and the percentages keep it consistent for calculations.

The reason you've received the letter from Rexam now is that until the last Budget the triviality allowance was £18,000. The Budget increased it to £30,000. Rexam probably already wrote to everyone who would get a lump sum of no more than £18,000 from them. The Budget meant that they could approach the ones between £18,000 and £30,000. The lump sum offer is a good deal for Rexam because it's paying out less than they would expect long term, making them more money. With the state pension deferral option it's also a good deal for many possible recipients of the lump sum.

So nothing to do in relation to the Rexam lump sum except maybe telling them what the HMRC basis calculation valuation of the other private pensions is so they know there's no point in contacting him in the future. They might do that because the value of the pension lump sum gradually decreases over time as the remaining life expectancy decreases.

kidmugsy

jamesd wrote: »

deferring for 30 years has a high chance of making an overall profit.

oops: typo.