Civil Service Voluntary Early Release (VER) ... tax position

ColinB

Hi
I'm a 58 year old Civil Servant (in the Premium scheme) who's just won the lottery, sorry that should read "... who's just been told his application for VER has been approved" The terms of that include a compensation payment and I'm trying to work out how much of that I actually get, but I need to understand how the taxation of that payment works. There are two factors here:
1. My pension will be actuarially reduced because I'll be taking it early, but I have the option of using some of the compensation to buy-out the reduction, which I think I'm going to do.
2. The first £30k of the compensation is tax-free, but the rest of it is taxed at my highest rate, which is 40%.

So does the tax get taken first and I fund the buy-out from what's left, or does the buy-out get taken before I pay tax ?

To put it another way, if the compensation is A and the buy-out is B, which of these calculations is correct :
Calculation #1: Tax = (A-30000)*0.4
Calculation #2: Tax = (A-B-30000)*0.4

Is there anyone out there in forum-land who's been through this and can advise how it worked for them ?

Thanks in advance.

(and I'm really looking forward to dealing with MyCSP )

ermine

ColinB wrote: »

So does the tax get taken first and I fund the buy-out from what's left, or does the buy-out get taken before I pay tax ?

#2 You normally pay pension contributions untaxed, 'cos you get taxed on the way out.

However, there is a serious world of hurt in computing what the value of an increase in DB pension is, and how much that eats into your annual allowance and lifetime allowance.

There's a strong case for taking independent financial advice, preferably from someone who knows your particular pension scheme (the employer and/or unions sometimes help with that)

The gory details are here

CathA

I took VERS in the first round, got my application in before the ink was dry on the e mail!!! If you have a look, somewhere on the Intranet is a calculator which does show how things are affected if you use your payment to boost your pension. In my case it really wasn't worth it. I can't remember where it is, no doubt it will have moved in the time since I've left.

As regards to your tax issue, I'm afraid I can't help, though you could ring MyCSP and ask them? When you can get through to them they are usually very helpful. The number is 0300 123 6666.

Finally, good luck and congrats on the escape! I left in 2012 and got a part-time job in Waitrose, best move ever!

xylophone

and I'm really looking forward to dealing with MyCSP )

Would all gain and no pain be good for the soul?:rotfl:

https://forums.moneysavingexpert.com/discussion/4875165
post 4 may be of interest.


http://www.civilservicepensionscheme.org.uk/media/41089/cscs_voluntary_exit_guidance_for_staff_tcm6-38086.pdf

ColinB

Thank you everyone, some really useful pointers here to follow up. Half the problem with trying to work this out is that, at present, I can only hope I've used the various calculators correctly and go on assumptions and generic advice; and when I get the formal offer with the real numbers in it, I only get 10 working days to decide so very little opportunity to get proper advice. Still, I'm not hearing anything that's likely to make accepting an unattractive option.

Andypandyboy

You can take the first £30,000 tax/NI free and if you pay the rest (up to specific limits but with an option to carry over amounts unused from previous tax years) into a pension pot that can be tax free too until you take it out. That is what our financial advisor told us.

So, effectively you save 40% at the off and only pay tax on whatever you take out thereafter. I think you should get advice though.

uknick

I took VER in 2012. From what you have said I assume the current package is the same, i.e. take lump sum redundancy money now or use it to fund any actuarial reduction in your pension if you were to retire early.

In my case I retired so early all the cash lump sum was used to pay off the actuarial reduction, so was not in your position. However, I believe the amount needed to buy out the actuarial reduction is deducted from your gross payment and you get the remainder, with any amount over £30k subject to tax.

Regarding the income tax, don't assume it will be at 40%. When during the tax year will you finish? Will you have been paid enough at that time to be in the 40% bracket?

Also, the lump sum will be taxed initially at a rate which assumes you earn the lump sum each month. For instance, if the taxable lump sum you get is £20k, the payroll assumes your annual earnings are £240k, plus whatever you did earn. Therefore, you be taxed at 50%. This can be reclaimed during the tax year, it's just a pain to have to do so.

Before you decide to use the lump sum to pay off the pension reduction, are you sure that is your best option? You haven't told us your normal retirement age, but if it is 60 can you cope for two years before you get your pension by living off the lump sum?

I sympathise with you regarding the issues around VER. I found nobody in the civil service was qualified to help me identify what was the best course of action. Most of the so called HR "help" team didn't even know what the income tax implications were. I'm lucky in that I'm an accountant and was able work out the various financial scenarios.

With regard to MyCSP, all I can say is good luck. You'll need it.

CathA

ColinB wrote: »

Thank you everyone, some really useful pointers here to follow up. Half the problem with trying to work this out is that, at present, I can only hope I've used the various calculators correctly and go on assumptions and generic advice; and when I get the formal offer with the real numbers in it, I only get 10 working days to decide so very little opportunity to get proper advice. Still, I'm not hearing anything that's likely to make accepting an unattractive option.

As I remember, I worked out that for every £1000 of lump sum I gave up, it gave me £68 per year more pension!! I didn't fancy that option, hence why I never did it.

Do you have partner or young children? That can also have an effect on your decision.

bigadaj

CathA wrote: »

As I remember, I worked out that for every £1000 of lump sum I gave up, it gave me £68 per year more pension!! I didn't fancy that option, hence why I never did it.

Do you have partner or young children? That can also have an effect on your decision.

That return is still more than double what you would get on the open market, for sake of comparison.

kidmugsy

bigadaj wrote: »

That return is still more than double what you would get on the open market, for sake of comparison.

Who could possibly want a 6.8% p.a. index-linked return, eh?

ColinB

uknick wrote: »

Also, the lump sum will be taxed initially at a rate which assumes you earn the lump sum each month. For instance, if the taxable lump sum you get is £20k, the payroll assumes your annual earnings are £240k, plus whatever you did earn. Therefore, you be taxed at 50%. This can be reclaimed during the tax year, it's just a pain to have to do so.

Say what ??? So you get overtaxed, just when your income drops ? That sounds really annoying, is there any way to avoid that ?

uknick wrote: »

Before you decide to use the lump sum to pay off the pension reduction, are you sure that is your best option? You haven't told us your normal retirement age, but if it is 60 can you cope for two years before you get your pension by living off the lump sum?

I always thought the point of buying-out the reduction is that you get the increased pension for ever (well, until death anyway). If you rely on topping up the pension from the lump sum then it doesn't have to last just two years, it has to continue making up the difference until you die ... which hopefully is a few years off yet. Or have I got that wrong ? Plus if I don't do it, I end up paying more tax (lots more tax), which kind of goes against the grain.