Is this Fair?

Roman_Holiday

Hi,
I’m about to retire on a final salary LGPS scheme.
My salary was significantly reduced in 2011 and my pension was protected at that point.
I have received a statement each year, but the protection element has never been calculated until now.
The uplift calculated in respect of the protection has been added to the current year’s pension growth, which has taken me well over the £40k annual tax allowance.
Taking the previous 3 years unused allowance still leaves me with a tax liability.
It seems unfair: if my salary hadn’t have been reduced in 2011, I would have continued contributing to the scheme without ever going over the £40k limit.
Can I argue that the calculation should be apportioned annually over the last 8 years rather than added as a lump sum to the current tax year?
Thanks in advance!

hyubh

Roman_Holiday wrote: »

I’m about to retire on a final salary LGPS scheme.
My salary was significantly reduced in 2011 and my pension was protected at that point.
I have received a statement each year, but the protection element has never been calculated until now.

I'll be honest, I'm not sure of the 'actual' situation, but are you basing this purely on your regular annual benefit statements? If so, these very likely won't have done the best 3 in 10 calculation (if that is the protection you are referring to), since that would likely only be done manually when calculating final benefits as a matter of practicalities only.

MarkCarnage

I think that the question is more about whether the augmentation should have been done as a single lump sum, which has adversely impacted the OP's tax situation, rather than as annual amounts, which presumably wouldn't have.

On the face of it, it does seem less than fair, as the shortfall is a gradual accrual, and the remedy should presumably have been the same. I wonder if the pension administrators have even thought about this? If it were me, I would very much be arguing the case for it.

Without knowing full circumstances it's difficult to know if there is a case for maladministration here, but based on what is written above, there is certainly a need for some questions to be asked.

Silvertabby

No maladministration - it's just the way it rolls. Adding the salary protection to each annual benefit statement is a non starter for two reasons - one, the amount of work involved ( a 5 minute job it aint) and two, (the biggee), because the terms of the protection haven't been met - ie, the member's date of leaving (inside the 10 year guarantee period) hasn't been confirmed. Plus, of course, benefit statements are NOT, in any way, guaranteed - they are just a snapshot of what may be available if all the information supplied by the employer is correct and has been input correctly. Benefit statements are only/can only be checked by the LGPS if they are wildly different from the previous years figures, when the software sniffs a possible glitch and sends up a red flag.

It's only once the member's date of leaving has been set in concrete that the protection is confirmed and the process starts. The LGPS asks the employer for the member's pensionable pay details as at their date of leaving and the previous 12 years. Not so arduous if the member leaves on 31 March, but more complicated for those who leave on any of the the other 364 days of the year. The best average/3 year calculation is done, and then the pension calculation has CPI applied from the date of the best pay figure used.

The £40K limit wasn't so much of a 'best pay' issue when I retired, so it may be that the LGPS is now looking at ways round this - but I doubt it for the reasons I have given.

hyubh

Silvertabby wrote: »

The £40K limit wasn't so much of a 'best pay' issue when I retired, so it may be that the LGPS is now looking at ways round this - but I doubt it for the reasons I have given.

Spot on - all that you say is exactly per the LGPC's guidance to administering authorities, only in plainer English:

For an active member becoming a deferred member or a pensioner member in the Pension Input Period, the pensionable pay used for calculating pre 1 April 2014 benefits (pre 1 April 2015 benefits in Scotland) included in the Closing Value will, of course, be an accurate pay calculation (and see paragraph 103 concerning Pensions Increase due under the Pensions (Increase) Act 1971). It is recognised that this might result in a significant increase in the final pay used to calculate benefits compared to the pay figure used to calculate benefits in previous Pension Input Periods (because, if the suggestion in paragraph 97 is followed [i.e., of ignoring any final pay protections in ABS figures], the best pay figure might not have been used in those previous calculations) but one would anticipate that if this results in an annual allowance charge there will be enough carry forward of unused allowance from the previous 3 tax years92 to cancel out the charge.

http://www.lgpslibrary.org/assets/gas/uk/AAv3.3c.pdf

Roman_Holiday

Thanks for all the responses.
I appreciate that the protected element of my pension is usually only calculated when the member leaves, I still wonder why it’s added in a single, final year when if it hadn’t been protected and my salary has stayed the same, I wouldn’t have breached the annual tax allowance in any year.
I feel I’m in a worse position due to having my pension protected (ironic).

Thanks for the Pension Manual link. It’s very technical so I’m not sure I was able to understand very much, but one paragraph intrigued me:
96. Of course, the pensionable pay period that a member might elect to use for calculating the Closing Value at the end of one Pension Input Period might be different to the pensionable pay period that a member might have elected to use for calculating the Closing Value at the end of the previous Pension Input Period (and a “switched on” Scheme member might like to do so in order to avoid an annual allowance charge).

So are the fund administrators completely objective or do you have to be a “switched on member” to avoid a tax charge? Sounds very unprofessional!
If so, how.....

MarkCarnage

Sounds like the Scheme Administrators need to 'switch on' too!

It does seem a rather arbitrary and potentially unfair approach. Who is responsible for declaring the amount (or not) to HMRC?

Roman_Holiday

The member is responsible.

Silvertabby

As I said before, I retired before the £40K limit/best pay scenarios became too much of an issue, so I'm limited to reading the same LGPS documents as you. However, the reference to the member being able to choose their own pensionable pay doesn't make sense to me - it's either the right pay or the wrong pay.

I wonder if OP's LGPS would be willing/able to run test calculations based on splitting the records, to see if that gives a better overall result?

That would mean splitting the records into two - the first one being the service up to the date the salary dropped, which would be a deferred record, and a new, live record from the date of the lower salary.

The deferred record would have the benefit of the higher salary and annual cost of living increases up to the date the benefits are taken (ie, gradual, yearly, increases instead of the full whack in the final year). Any Rule of 85 protections would still apply, as deferred service also counts.

The new record, however, would lose any residual R85 protections. In addition, the final pensionable pay for the period 2011 to 2014 would be the member's current pensionable pay and not the protected pay.

If the tax bill is substantial, then it may be that splitting the records would mean that the pension losses are less than the tax that would have been due. (Remember that you would be comparing a reduction in your annual pension for life, against a one-off tax bill).

Worth asking if your LGPS would/could do this?

Roman_Holiday

Thank you. I’m in the process of writing to the pension fund with a number of queries and I’ll include your suggestion.