Retirees through ill health could face hefty pension tax bills

30 January 2020

Workers retiring early due to ill health could face hefty pension tax bills, Royal London has warned. 

The issue arises among those workers who are unable to work because of ill health, but receive a significant boost to their pension rights, potentially placing them in breach of their pension tax relief limits.

According to Royal London, the issue is most likely to affect public sector workers such as teachers and nurses where pensions are salary related.

The pension specialist said in some schemes, a worker is treated as if they had continued working from the date of early retirement up to pension age with the additional pension rights from that assumed service added in one lump. While this may sound attractive, adding years of service to the pension overnight can result in a huge surge in the value of a pension, with an increase in excess of £2,500 per year enough to cause an issue.

A freedom of information request to Greater Manchester Pension Fund found that six people were subject to tax charges in the 2018/19 tax year as a result of the rules. However, hundreds more workers could be affected across the various local government, NHS, teacher and civil service schemes, Royal London said.

Steve Webb, director of policy, Royal London, commented: “Pension schemes do not hand out early retirement benefits lightly and it seems very harsh to punish those who are in poor health with big tax bills.

“It is not the case that the workers who face these bills have been shovelling money into a pension in order to max out on pension tax relief.  They have simply found themselves unable to do their job, often through no fault of their own, and it is quite wrong to saddle them with a large tax bill as a result.”

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