NHS pension for 2001-2007

aroominyork

OH is thinking about whether to claim the NHS pension now or later. She is a higher rate taxpayer. Three options:

1)      Claim it now. Pay 40% tax on the four years’ backdated pension (4 x c.£3750pa = £15k) and reclaim the tax by making £12k SIPP contributions.

2)      Wait and see if OH becomes a standard rate taxpayer in a later job. Claim it then and either pay into SIPP or ISA (6.25% upside on SIPP if she retires as a standard rate taxpayer).

3)      Claim it after retiring. Her state pension will be c.£7000 so, if she does not drawdown on her SIPP in the first year, about £5500 (at current tax band levels) of the backdated pension would be tax free.

My own hunch is option 1 for two reasons. First, in ‘normal’ stock market conditions it will grow more than if index linked by the NHS. Second, investing in a SIPP gives the 6.25% tax benefit (not paying 20% on 25% lump sum). If she goes from higher rate taxpayer to retired (without a standard rate job in between) she could lose the option to invest it in a SIPP given she could anyway use other funds to pay into her SIPP up to the £4k limit after retiring.

I reckon this is not completely accurate so thoughts would be welcome

Silvertabby

Note that if your wife doesn't take the back dated pension now, and tells the NHS that she wants to defer payment, then it is probable that when she does request payment it will be paid from the date of the request with no back dating.  That's what the LGPS would do.

When a pension is payable unreduced (no early payment reductions) then there is no benefit to be gained by deferring it.  Quite the opposite - even in the case of a HR taxpayer, 60% in your pocket is better than 0%.

xylophone

I think it was her only contrated out scheme although, like 99% of the UK population, I don't really understand contracted in/out. Is this point relevant/important?

Does her state pension forecast show a COPE? This was used once only in determining her starting amount for NSP.

https://www.which.co.uk/money/pensions-and-retirement/state-pension/your-state-pension-forecast-explained-a24r12y9jt41

On 6/4/16, two calculations were done for her

Old rules

NI years/30  x £119.30 + (Additional State Pension - Deduction for Contracting Out)

New Rules

(NI years/35 x £155.65) - COPE

Her "starting amount" was the higher of the two. She was able to improve it by contributions or credits.

What does her forecast say about this?

aroominyork

I wonder, xylophone, if you could easily answer the question if I tell you Gateway says:

You have:

• 21 years of full contributions
• 2 years to contribute before 5 April 2023

You do not have any gaps in your record.

AND

You can get your State Pension on 20 December 2023. Your forecast is

£134.70 a week

£585.70 a month, £7,028.45 a year

Dazed_and_C0nfused

The extra two years would take it to £144.96/week which is more than someone entirely under the new rules would get for 23 years contributions so not too shabby 

aroominyork

Dazed_and_C0nfused said:

The extra two years would take it to £144.96/week which is more than someone entirely under the new rules would get for 23 years contributions so not too shabby 

"£134.70 is the most you can get" and "You need to continue to contribute National Insurance (until Dec 2023) to reach your forecast" but I agree not shabby. She has been in the UK for 20 years but still considers herself a new arrival for pension purposes and was surprised her state pension will be this much.

justcheckin

aroominyork said:

ggmf said:

Nice little windfall, enjoy!

Thanks. Will the windfall be taxed at her current marginal rate?

If your wife had any personal allowance left over in the last years since turning 60, then there is a niche piece of pensions taxation legislation which entitles you to have the backdated pension ascribed to the tax years it would have been payable in. @xylophone taught me this for my (in hardship!) mum's lost pension, and after a bit of to-ing and fro-ing she got all the tax back.

One of the best things that ever came out of MSE for my family. 

justcheckin

In case useful here is a template of the successful letter I drafted to HMRC for my mum after Xylophone guided me to the tax manual:

Dear Sir/Madam,

I recently received arrears of occupational pension from the xxx Pension Scheme comprising amounts as follows: 14 years of backdated Annual pension; total: £16768.04. I understand from HMRC manual EIM74103 that I may request that the above backdated amounts be treated for income tax in the years they would have been due: 

‘The pensioner should contact the tax office and supply a schedule showing the years to which underpayments are attributable. HMRC will spread the payments back over the relevant years and recalculate liability. Underpayments in the earlier years may be set-off against the resulting over-payment in the year of the lump-sum payment.’

I have requested and obtained from the xxx pension scheme a breakdown by tax year of the amounts of these arrears. I therefore request that you use the following schedule to classify these payments for income tax:

Tax year 2006/7 total to be attributed to this tax year: £988.15

Tax year 2007/8 total to be attributed to this tax year: £1023.11

Tax year 2008/9 total to be attributed to this tax year: £1063.06

Tax year 2009/10 total to be attributed to this tax year: £1115.52

Tax year 2010/11 total to be attributed to this tax year: £1119.25

Tax year 2011/12 total to be attributed to this tax year: £1151.03

Tax year 2012/13 total to be attributed to this tax year: £1209.25

Tax year 2013/14 total to be attributed to this tax year: £1238.56

Tax year 2014/15 total to be attributed to this tax year: £1271.74

Tax year 2015/16 total to be attributed to this tax year: £1288.34

Tax year 2016/17 total to be attributed to this tax year: £1289.40

Tax year 2017/18 total to be attributed to this tax year: £1301.21

Tax year 2018/19 total to be attributed to this tax year: £1338.32

Tax year 2019/20 total to be attributed to this tax year: £1371.10

 I would be grateful if you could reassess the income tax I have already paid on these monies and send me a refund for the overpaid tax.

Many thanks,

 Mrs xxx, NI number: xxxxxxxxxx

aroominyork

Helpful to know, justcheckin, though I think she was a higher rate taxpayer over these years and in any case she'll pay it straight into SIPP. A question: should she declare the 'windfall' and SIPP payments through self assessment (she hasn't completed self assessment in the past) or is a letter to HMRC with supporting documentation sufficient?

Dazed_and_C0nfused

aroominyork said:

Helpful to know, justcheckin, though I think she was a higher rate taxpayer over these years and in any case she'll pay it straight into SIPP. A question: should she declare the 'windfall' and SIPP payments through self assessment (she hasn't completed self assessment in the past) or is a letter to HMRC with supporting documentation sufficient?

On its own it wouldn't normally be a reason to complete a Self Assessment returns (unless it brings another Self Assessment factor into play such as income in excess of £100k or the HICBC).

There is nothing for her to declare, the company making the pension payment report it as usual under the Real Time Information system.

What she needs to decide is if she wants to claim for it be spread over the years it relates to.  Which may not be a good idea if she was already a higher rate payer.

Remember tax relief on pension contributions is only ever due in the tax year the contribution was made in so any payment she makes between now 5 April 2022 can only ever impact the tax position for 2021:22.