Civil Service Pension & Tax

Catonthemoon

I was retired from the Civil Service on the grounds of ill health in 2013 (I was in the Classic Scheme). Due to circumstances, I didn’t claim it at the time; I am now looking at doing so. My annual pension will be 12k. MyCSP have confirmed that it will be back-dated (ie 12k x 12 years = £144000). What I was hoping to do was to take this over a 10 year period which would give me an annual pension of 26k (12 + 14) for the next 10 years. In other words, in 10 years time, the 144k will have been used up & I would revert to just the 12k pa. Well, that’s what I was hoping to do! MyCSP have informed me that it’s not possible & that the back dated amount would be paid in one go as a ‘supplementary’ payment. According to my calculations, I would pay roughly 41k in income tax. Do I have to accept that there’s no way around this & I’m just going to have to ‘take the hit’? I’m 62, don’t have any assets (property etc), I’m in rented accommodation, so these funds have to last me for life - the last thing I want to do is to go ahead & return the paperwork only to discover later that I could have minimised the tax bill if I’d done xyz.
Very grateful for any advice/input.

Marcon

Catonthemoon said:

I was retired from the Civil Service on the grounds of ill health in 2013 (I was in the Classic Scheme). Due to circumstances, I didn’t claim it at the time; I am now looking at doing so. My annual pension will be 12k. MyCSP have confirmed that it will be back-dated (ie 12k x 12 years = £144000). What I was hoping to do was to take this over a 10 year period which would give me an annual pension of 26k (12 + 14) for the next 10 years. In other words, in 10 years time, the 144k will have been used up & I would revert to just the 12k pa. Well, that’s what I was hoping to do! MyCSP have informed me that it’s not possible & that the back dated amount would be paid in one go as a ‘supplementary’ payment. According to my calculations, I would pay roughly 41k in income tax. Do I have to accept that there’s no way around this & I’m just going to have to ‘take the hit’? I’m 62, don’t have any assets (property etc), I’m in rented accommodation, so these funds have to last me for life - the last thing I want to do is to go ahead & return the paperwork only to discover later that I could have minimised the tax bill if I’d done xyz.
Very grateful for any advice/input.

Normally it's possible to have a backdated pension payment treated as if it had actually been paid in the years to which it related, provided you had a right to it in the years in question. The scheme would need to give you the requisite year by year breakdown and you'd then forward it to HMRC and ask for the appropriate adjustments to be made. See https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim75020 and read the section headed 'Pensions paid in arrears'. Then - before doing anything else - check with the CS scheme that they can do that - some of these public sector schemes have some curious quirks, and in your case it could be that the 'right' only arose when you actually asked for the pension to be paid.  I don't know, which is why I'm suggesting you check - although others with more familiarity with the scheme may be able to give positive confirmation either way.

Be aware that if you had pension benefits which you chose not to claim, you might have been claiming state benefits to which you were not entitled, which could open a real can of worms.

hugheskevi

check with the CS scheme that they can do that - some of these public sector schemes have some curious quirks, and in your case it could be that the 'right' only arose when you actually asked for the pension to be paid.  I don't know, which is why I'm suggesting you check - although others with more familiarity with the scheme may be able to give positive confirmation either way.

It should operate in exactly the way you have set out from what has been described.

Note that although the pension may now be £12,000 p/a, that £12,000 will include annual increases from 2013. The arrears will just be the sum of what would have been paid without any interest, so will be somewhat lower than 12x12=£144K.

Taylor2000

Please see the following post

https://forums.moneysavingexpert.com/discussion/6595672/the-taxation-of-pension-income-pension-payments-made-in-arrears?utm_source=community-search&utm_medium=organic-search&utm_term=taxation+of+pe

Marcon

Taylor2000 said:

Please see the following post

https://forums.moneysavingexpert.com/discussion/6595672/the-taxation-of-pension-income-pension-payments-made-in-arrears?utm_source=community-search&utm_medium=organic-search&utm_term=taxation+of+pe

Looking at the answers on that thread, I understand your confusion! Taken from HMRC's manual using the link I've given above (my emphasis):

Whether pension income is taxable when it is paid (the arising basis) or when the pensioner becomes entitled to it (the accrual basis) depends on the type of pension income. Where pension income is taxable on the accrual basis, the amount of the pension income charged to tax is the amount that the pensioner is entitled to in the tax year, regardless of what amount is actually paid.

The following types of pension income are taxable on the accrual basis:

• pensions and certain lump sums paid under a registered pension scheme

Taylor2000

@marcon From your comments above am I correct in thinking that someone who has deferrred their occupational pension from age 60 to SPA (age 67) and then receives a large backdated lump sum of pension payment arrears then they can in fact have those payments attributed back to relevant tax years (so as not to face higher rate liability) and that the info given in the link I posted is incorrect? It's just that other posters certainly seem to think that someone who has deferred their pension would not be able to take advantage of this and that it only applies  "If a pension provider discovers a long-standing underpayment of pension, ..." .

Catonthemoon

Thank you all for replying. Marcon: after reading your comments & EIM75020, I thought this would work out very advantageously for me, even better than what I had asked the scheme administrators about (taking 14k over 10 years- similar to a phased drawdown); as mentioned, they’ve said I cannot do that. As such, the back dated gross amount of 144k ( they call it a supplementary payment), will have tax deducted at source ( I calculate this to be c. 48k) - I will receive a net amount of  96k . According to EIM75020, if at the end of this tax year I submit a schedule to HMRC showing what my income ‘would have been’ from the time my ill health pension became payable (2013), the first year that the 144k could be attributed back to would be 2013/14 .My income for that year ‘would have been’ as follows:
Civil Service pension 12k
ESA                              6k
Total for the year.        18k

My tax free allowance would cover the 12k (more or less, just for simplicity); tax on 6k @. 20% = £1200. 

That scenario replicated up to the current tax year, would mean I ended up paying a total of £14400 (£1200 x 12 years) in income tax. 

That’s my interpretation of the section of the document ‘pensions paid in arrears’. Have I got that right or am I overlooking something?
£14400 is obviously far preferable to 48k…if it’s doable!

Taylor2000

@Marcon If you kindly have the time could please reply to my query dated 3/6/25. Thank you ever so much.

Marcon

Taylor2000 said:

@marcon From your comments above am I correct in thinking that someone who has deferrred their occupational pension from age 60 to SPA (age 67) and then receives a large backdated lump sum of pension payment arrears then they can in fact have those payments attributed back to relevant tax years (so as not to face higher rate liability) and that the info given in the link I posted is incorrect? It's just that other posters certainly seem to think that someone who has deferred their pension would not be able to take advantage of this and that it only applies  "If a pension provider discovers a long-standing underpayment of pension, ..." .

I think the fact that was given as a specific example has distracted people from what the 'statutory basis' is, as confirmed by the manual ie pension payments are taxable on an 'accruals basis'. PAYE operates on an 'arising' basis, which is how backdated payments made as a lump sum can push people into a higher tax bracket.

The manual confirms that:

'Pensioners are often content to pay Income Tax on the amount received in a year, as in most years the amounts accruing and received are similar. However, it is possible in certain circumstances for the amounts to be different. If a taxpayer requests the statutory basis this should be accepted.'

The key point is 'entitlement'. If in doubt, check with HMRC before taking any action.

Taylor2000

Thank you for your reply @Marcon. As @Catonthemoon says paying "£14400 is obviously far preferable to 48k".

However, @Catonthemoon you may wish to look at the following post  https://forums.moneysavingexpert.com/discussion/6594339/backdated-occupational-pension/p1

This explains that if you do take the backdated pension payments/arrears at any time before before you reach SPA then they are classed as actual income and will affect your ESA.

If taken before SPA as a lump sum backpayment  to the commencement date then they are regarded as being paid on the date that each individual payment was due, which results in an overpayment of the IR benefit from the deferred commencement date until the lump sum was taken.

Catonthemoon

@Marcon  Thank you. My post concerned the tax liability on my deferred CS Pension, but now that you’ve drawn my attention to the possible implications of having been in receipt of state benefits, that’s given real cause for concern 🙁. 

I’ve been in receipt of ESA (IR), HB & CTB for the whole of the deferral period.

I hadn’t been aware that I could ask HMRC to reassess me for individual years going back to the ‘entitlement date’ (when I could have claimed it in 2013/14); assuming that’s possible, that could mean that I pay circa £34k less in income tax.

Regarding the above mentioned benefits, my intention was to end the claims when the pension funds are received, the thinking being that as they are no longer ‘live claims’, then that would be the end of the matter. In other words, by doing so, it would take away the DWP & the Local Authority’s right to pursue/attempt to recover any benefits deemed to have been overpaid.

I have since become aware that that’s not necessarily the case (primarily from all the really knowledgeable & helpful people on here). I read a section of the DWP rules & regs which stated that they could seek to recover overpayments even when a claim has been closed.

I do wonder if I just ‘take the hit’ with the tax liability (circa £48k), I might be allowed to keep the net amount without the possibility of any benefits overpayments becoming an issue (although that may be wishful thinking). or

by requesting to be reassessed by HMRC to reduce my liability to circa £14k, could that be the point at which the can of worms is opened?