Not Many People Know This

a cautionary tax tale for early retirees

SUMMARY

Very simply, if you took early retirement from the Civil Service and your lump sum was abated with a "WPS (Widow(er)s Pension Scheme) adjustment" that adjustment can be deducted from your income in the tax year in which you retired. This would have been an entry which you would have had to make in your tax return for that year and might have reduced your tax bill by a substantial amount (over 2,000 in my case). If you failed to do this at the time you can still write to your tax office setting out the details (if you were given an explanatory letter about the tax status of the adjustment, as I was, it should be enclosed). The Revenue seem to understand the issue (well, they do at PD2) and handles these claims quickly.

The Tale

I am one of the many former Civil Servants who received an early retirement package in the years 1995 - 97, from DTI in my case and more or less on "compulsory terms",

First, as I expect all members know, widow(er)s' pension contributions are deducted from pay at the rate of either 1.5% or 1.75%. They are, of course, tax deductible. The rules on widow(er)s pensions seem to require that these contributions have to continue to be made up to the normal retirement age of 60. If people take early retirement (under the package most of us got in the mid 1990s - and I think it is a general rule) then the contributions till age 60 are lumped together and deducted from the lump sum paid under the PCSPS.

When early retirement schemes like this are publicised there are usually warnings of this deduction (the "WPS adjustment"). When I got illustrative calculations of the value of my own package the deduction was shown (6,530) and I took account of it in my decision to accept the terms. In the final weeks before my retirement, which was on 26 March 1997, I got the formal letter from the pensions section setting out the terms of my retirement. It mentioned the WPS adjustment and said it " . . (might) qualify for a measure of tax relief . . . a statement for submission to the Inland Revenue is enclosed". The enclosure was a letter certifying the payment of the 6,530 as pension contributions.

It simply did not occur to me that this sum (money I had never actually got my hands on) could be set against income in the year of retirement for tax purposes and relief claimed. Looking back, I know I should have spotted the meaning of this at the time, but the whole question of the tax treatment of the lump sum and the redundancy "compensation payment" (and in some cases though not mine, "pay in lieu of notice") was a bit fraught, and was made more fraught by the introduction of the new self assessment system. In the end it was clear that my lump sum and compensation package were tax free. By the time that was clear, though, I had either forgotten the issue of the tax relief on the widow(er)s' pension contributions or thought that it was something that might have come into play if the Revenue had decided some of my lump sum was taxable or that it was something that would become relevant at age 60 (when the widows' pension contributions are repayable if I am not then married). Another factor is that as an employee, tax deductions regarding pension payments had always been handled automatically under PAYE and the P60: I had never had to DO anything about them myself.

I realised what I should have done when I had lunch late last year with another early retiree who was bemoaning the fact that he had only been able to get tax relief on his widow(er)s' pension contributions at 23% because his early retirement had been soon after 5 April and he had not earned enough in that tax year to pay tax at 40% and take full benefit from the windfall (I had retired on 27 March, thankfully). The moment he voiced his complaint I realised what I might have missed! I wrote to my Tax Office (PD2) explaining the situation and enclosing the letter the pensions section had provided and claiming back tax on the 6,530. Fortunately I was still well within the time limits (6 years I think) and the Revenue sent me the rebate within a fortnight: including some interest it totalled 2,703.

It is all a bit humbling - I thought I was on top of things like this - and would cheerfully advise my colleagues on how to arrange their affairs! I have since found, however, that others too were unaware of the tax significance of the "WPS adjustment" but have now been able to benefit from it, if belatedly.


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