Civil Service Pension Error – £22K Overcharged for Added Years + Retirement Plans Now Unclear

Frugaliza

Subject: 

Hi all,

I’m 58 and had originally planned to partially retire at 59 (in about 4 months). However, my application for partial retirement seems to have flushed out some errors in both my pay and pension records.

As a result, I’m now unsure whether I can proceed with partial retirement as planned, or even what my pension figures truly are. Ideally, I would like to fully retire as soon as possible, but I need clarity on the financial implications first.

The issue:

My employer has informed me that I was overcharged around £22,000 over the past 23 years due to miscalculations in deductions for 'added years' under the Classic scheme. This error crept in when my working hours changed (part-time), and incorrect contribution levels were applied.

They have completed a calculation and confirmed that I am due a £22K repayment, pending my instruction on how to receive it.

On top of this:

Civil Service Pensions (MyCSP) have also told me that my added years entitlement was overstated due to a system error. A correction is pending, and I assume this will reduce my reckonable service and therefore the pension I had expected.

I don’t yet know if these two errors are linked, but I suspect they are.

My questions:

1. Where should the £22K repayment go?
   I pay 40% income tax, so my initial thought is to divert it into my Civil Service AVC pot to avoid a large tax bill. Is this the most tax-efficient approach?

2. Buying extra Classic pension — worthwhile?
   The calculator on the CS pensions site suggests £22K would buy me about £1,000/year of additional pension — not attractive, as I’d need to live 23 years to break even. Do others agree?

3. Should interest or inflation be added?
   Getting £22K back sounds good, but if these small monthly overpayments had been paid to me correctly:

   • I could have invested them

   • Overpaid my mortgage

   • Gained compound interest or tax relief elsewhere

   Does anyone know if compensation for lost value (interest/inflation) can or should be pursued?

I'm also affected by the McCloud remedy, and have Alpha service in recent years, but my main concern here is the repayment, tax, retirement timing, and compensation for what is essentially 23 years of underpayment.

Grateful for any advice or similar experiences.

hugheskevi

1. Where should the £22K repayment go?
   I pay 40% income tax, so my initial thought is to divert it into my Civil Service AVC pot to avoid a large tax bill. Is this the most tax-efficient approach?

There isn't anything more tax-efficient.

1. Buying extra Classic pension — worthwhile?
   The calculator on the CS pensions site suggests £22K would buy me about £1,000/year of additional pension — not attractive, as I’d need to live 23 years to break even. Do others agree?

You cannot buy extra classic pension, only alpha. 

Since the discount rate was reduced to CPI+1.7%, Added Pension now is expensive certainty, especially with the awful commutation rates meaning there is effectively no tax free lump sum. A DC pension would be expected to be better on average, but there are no guarantees with DC.

1. Should interest or inflation be added?
   Getting £22K back sounds good, but if these small monthly overpayments had been paid to me correctly:

   • I could have invested them

   • Overpaid my mortgage

   • Gained compound interest or tax relief elsewhere

   Does anyone know if compensation for lost value (interest/inflation) can or should be pursued?

If you pursue the pension scheme, you might get a small payment of £250 or maybe £500 to compensate for the error. If you pursue your employer they might agree to an ex gratia payment that could be higher.0001

Frugaliza

Thank you hugheskevi really helpful to have my thinking confirmed on the AVCs. 

One complication with putting the £22K into my CS AVCs is the need to avoid breaching the Annual Allowance for pension contributions. I had hoped to fully retire within the 2024/25 tax year, but I now realise I’ll need to make sure I earn enough salary in-year to cover:

• The £22K AVC top-up

• My own pension contributions

• The employer’s contribution into the defined benefit (DB) scheme

As I understand it, the total of all these mustn’t exceed  the £60K  Annual Allowance or my total earnings for the year — whichever is lower.  As I'm going part time my salary will drop quite significantly below that threshold

The problem is, the employer’s contribution into the DB scheme isn’t visible on payslips. Does anyone know how I can quantify the employer’s contribution for Annual Allowance purposes?

Many thanks for any insight.

Sarahspangles

I think you mean you plan to retire in 2025/26 tax year?

There are two separate limits for pension contributions - relevant UK earnings and Annual Allowance. They are calculated differently.

Your relevant UK earnings - generally your taxable earnings* - need to cover your own gross contributions. I assume in 25/26 this will be your pension contributions plus the AVCs plus the tax relief. You’re correct, you need to earn enough to cover this in year, there are no inter-year carry forward arrangements. Employer contributions are not included in this calculation.

The Annual Allowance needs to cover your Pension Input Amount. This is the growth in your DB pension. The AA also needs to cover any pension contributions you make into other schemes. I’d let your employer make the PIA calculation given they are correcting errors. Your AA is £60k but if you exceed this there is scope to carry forward from the previous three years - but remember your PIA in those years needs to be deducted first, again your employer should tell you the PIA..

*  most lettings income is not earnings, nor bank interest 

hugheskevi

One complication with putting the £22K into my CS AVCs is the need to avoid breaching the Annual Allowance for pension contributions. I had hoped to fully retire within the 2024/25 tax year, but I now realise I’ll need to make sure I earn enough salary in-year to cover:

• The £22K AVC top-up

• My own pension contributions

• The employer’s contribution into the defined benefit (DB) scheme

As I understand it, the total of all these mustn’t exceed  the £60K  Annual Allowance or my total earnings for the year — whichever is lower.  As I'm going part time my salary will drop quite significantly below that threshold

The problem is, the employer’s contribution into the DB scheme isn’t visible on payslips. Does anyone know how I can quantify the employer’s contribution for Annual Allowance purposes?

Many thanks for any insight.

If you are going part-time and salary will be well below £60,000 it is extremely unlikely the Annual Allowance will be an issue for you.

It is only your own contributions that need to be below income eligible for tax relief, not employer contributions or pension input amount.

You need to read Sarahspangles post above and understand about relevant earnings and Annual Allowance which are separate things - although probably neither are a constraint for you.

If you are only going to be a basic rate taxpayer then AVC contributions are much less attractive - still possibly the best thing to do, but much less clear than if they got higher rate relief.

LHW99

No knowledge but - if this overpayment has been built up over a number of years through no fault of the OP, could it be (re)classified in some way as relating to those years for pension contribution purposes - thus reducing the individual amount per year?