Do you own a lost or over-taxed pension?
Pensions have been lost when those looking after them destroyed crucial records, warns Louise McBride
People who have battled for years to get the pension they are entitled to are being hit with major tax bills when they finally get the money they're owed - and are ending up with much smaller pensions than would have been the case had they been paid their money on time.
Many are losing out on thousands - and in some cases, tens of thousands - of euro as a result.
This problem has largely arisen because many of those receiving pension back-payments since 2011 have been hit with the controversial tax levy, the Universal Social Charge (USC). However, had these people got the pension they were entitled to on time, they would not have lost much - if any - of it to the USC. People are also often pushed into a higher income tax bracket when they receive a series of pension back-payments at once, triggering a higher income tax bill than would have otherwise been the case.
The USC has been in place since 2011 but people who were underpaid pensions prior to 2011 and who are only receiving the back-payments now must often pay the USC on that money, depending on how large those back-payments are.
"Some of the people who were owed money on their pension because they were messed about (by their employer or pension provider) are now getting hit for the USC (on pension back-payments) - whereas they wouldn't have had to pay the USC had they got the correct pension at the right time," said Pensions Ombudsman Paul Kenny.
"So in the first place, they were deprived of a pension they were entitled to for a number of years and now, when they're paid the pension money they're owed, they're getting hit for the USC.
"Unfortunately, the legislation governing the USC is framed in such a way that the levy becomes payable when the money is paid over. It was framed deliberately in this way to prevent avoidance of the USC by people who were in a position to decide on the due dates of such things as bonus payments.
"However, it is grossly unfair that pensioners should be penalised on the double for the mistakes of others. Essentially, people are getting hit for the USC for pension payments that should have been received at a time when the USC didn't exist."
"Another problem with pension back-payments is that they can place people in a higher income tax bracket than they might otherwise be in because they get a whole lump sum of taxable back-payments at once," said Mr Kenny. "So even if the highest rate of tax the individual normally pays is 20pc, the person may be shoved into the higher tax rate band of 40pc because of the back-payments.
"In general, income tax is paid in respect of the years in which a pension payment is due - rather than actually paid. But if back-payments are more than four years old, you could pay tax as if you received those payments today."
A number of cases have been referred to Mr Kenny where a pension has been underpaid for one reason or another - and sometimes, over a very long time. In one case, an individual had to wait almost nine years to get the pension she was entitled to. Pension back-payments could arise if you have been wrongly refused a widow's pension, for example.
"Or you could be a local authority worker who has an overtime payment which was not deemed to be pensionable by the employer but which we found to be pensionable after examining your case," said Mr Kenny. "By the time you get your pension back-payments, you could be hit for the USC on those payments. If you were in a situation where you were owed a serious amount of pension back-payments, you could lose a significant amount of that money to tax."
Lost tax breaks
Getting a chunk of pension back-payments at once can also scupper your chances of qualifying for an allowance which would chop your USC bill. The maximum USC rate for an individual aged 70 or more is set at 3pc, for example, if that individual's income for the year is €60,000 or less.
Normally, the top USC rate on income of €60,000 is 5.5pc. So should pension back-payments push you over that €60,000 threshold, you would lose your eligibility for that preferential USC rate.
Similarly, pensioners don't have to pay the USC if the income they earn this year is less than €13,000. Once the €13,000 threshold is exceeded, the USC must be paid on the full amount of income. Pension back-payments could easily push you over that €13,000 threshold - even if you've only got a tiny private pension.
A spokeswoman for the Revenue Commissioners said the USC was charged on pension back-payments "which are paid in a tax year other than the year in which they are earned. The legislation provides that payments that are processed through the PAYE system are liable to USC in the tax year in which the payments are made. This would equally apply to arrears of pay and bonuses. There is nothing that allows for the arrears (that is, pension back-payments) to be subject to USC in a year other than the tax year in which they are paid."
Another major problem facing pensioners or those close to retirement is that people often can't trace a pension they believe they are entitled to. In some cases, pensions have been lost because records were destroyed after a change of pensions administrator, according to Mr Kenny.
"In one case, the administrator for a pension scheme changed four times and the administrator in the middle destroyed the records for that scheme," said Mr Kenny. "We can do nothing without those records - we don't know what happened to the pensions and we cannot track them.
"In effect, some people have lost their pension as a result of this. There have been other cases where pensions have gone missing after a company has gone out of business or has been taken over by another business. Records have sometimes been lost when there is a handover to a new administrator, so the new administrator won't have all of the details of the preserved pensions that it is supposed to have."
A preserved pension is a pension which is owned by a former employee of a company, which that individual decided to leave in the company's pension scheme with a view to accessing it at a later date. It is these preserved pensions which are often the most difficult to trace.
They typically relate to pensions taken out at the start of an individual's career, before they moved to a long-term job.
You could be losing out on tens of thousands - perhaps hundreds of thousands - of euro by forgetting about or losing out on a pension taken out in your youth.
"People may have changed addresses since taking out a pension in their 20s and never informed that pension scheme's administrator of this," said Jerry Moriarty, CEO of the Irish Association of Pension Funds (IAPF).
"Forty years may have passed since that pension was taken out. People might not remember where they worked at the time or who the pensions administrator was. It can be particularly hard to trace a pension if you have moved abroad since taking one out."
It can also be hard to trace a pension when the employer behind it is no longer around. Don't give up hope, though. "The money in a pension is held in trust, so it's still your money and it's still there," said Jim Hegarty, chairman of Hegarty Financial Management.
Should you hit a brick wall when tracing a pension, contact the Pensions Authority, as it keeps a register of company pension schemes. Another useful way to track a pension is to ask previous colleagues who also worked with the employer.
To prevent yourself running into difficulties tracing a pension you took out in your early career, keep a record of the name of the administrator for each of the pension schemes you have paid into, as well as the administrator contact details.
Update that record should there be a change of administrator. Be sure too to inform the administrators if you change your address, so that it can contact you when the time approaches for your pension to be paid - or if there have been any major developments affecting your pension. The same applies should you decide to change your surname after getting married. Otherwise, you risk losing out on that pension.
"For those who have left employment, it's no harm to check in periodically with the administrator of the pension scheme that you paid into when working," said Mr Kenny. "From time to time, request an annual benefit statement - so you can get an update on how your pension is. Even this will serve as a reminder to the administrator that you are there. Hold onto all of the pension records you have. Old letters establishing your entitlement to a pension are very important. The importance of holding onto pension records cannot be over-emphasised."
Sunday Indo Business