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Last Updated: Saturday, 15 March 2008, 14:54 GMT
Minister ponders pension tax help
By Paul Lewis
BBC Radio 4's Money Box

Placards raised during a pension protest in Parliament Square - credit: Andrew Parsons/PAWire
The workers ran a high-profile campaign over their lost pensions
Pensions Minister Mike O'Brien will "see if it is possible" to reduce the tax due on compensation paid to people whose company pension was wound up.

The money is due under an improved government scheme announced before Christmas.

As a result some people will get payments backdated for five years, but the payment will be taxed in the year it is paid.

That could mean higher rate tax of 40% is due on part of the lump sum.

It is another classic example of the Treasury giving with one hand and taking it back with another
Dr Ros Altmann, pensions campaigner
Pensioner's predicament

One person who is at risk of this high tax is Peter Humphrey, who worked at Dexion until it collapsed, just before he was due to retire in 2003.

He told Radio 4's Money Box programme:

"My pension should have been around 18,000.

"I will only get 90%, so about 15,000 and backdated four years means 60,000 in one lump.

"That means I am going to pay 40% tax on that - which is an awful lot of money.

"I do not see any reason why they cannot work it out year on year.

"Having waited five years, they ought to be paying interest on it, not charging tax on it as well."

How did this happen?

The large payments are due because the government originally said it would pay much smaller compensation and only from the age of 65.

But after losing a case in the Court of Appeal, ministers decided to pay more compensation and backdate it to the age of 60 for those whose scheme let them retire at that age.

I can't say I am going to be able to help, but I am going to see if it is possible
Mike O'Brien, Minister for Pensions Reform

As a result some of the 140,000 people the scheme will help, will find they are paying tax on the lump sum at a higher rate of tax than if it had been paid over the years it was actually due.

Dr Ros Altmann, who has campaigned for five years to get the compensation scheme, told the programme:

"It is another classic example of the Treasury giving with one hand and taking it back with another.

"Some should not have paid tax at all but will be pushed into the 20% bracket - some will be pushed into the 40% bracket."

Search for a solution

Mike O'Brien, Minister for Pensions Reform said he was looking for an answer.

"I understand the point they are making - I have asked my Department for Work and Pensions officials to work out with the Treasury how many will be affected and to see if there are ways to help these people.

"I am not promising we can, because there is still work to do. "I can't say I am going to be able to help, but I am going to see if it is possible."

One precedent is the way the state pension is taxed if it is deferred for some years and paid as a lump sum.

That is taxed at the same rate as other income is taxed, rather than pushing total income into the higher rate tax bracket.

But Mike O'Brien said that was different:

"It is a special concession for those who defer their state pension.

"I am not sure if Ros Altmann is suggesting we should make a new tax rule just for people on [this] scheme.

"I do not know if I have got to do that yet."

BBC Radio 4's Money Box was broadcast on Saturday, 15 March 2008 at 1204 GMT.

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