Members of the Kodak Pension Plan (No.2) (KPP2) are facing tax charges on pension savings they will no longer receive, after the scheme entered the Pension Protection Fund (PPF) assessment last week (25 March).

KPP2 members who have paid a Lifetime Allowance (LTA) tax charge on their pension, but who are facing a cut of 10 per cent or more in their savings, will be paying tax on pensions they no longer receive, as well as “penal” tax charges if they seek to rebuild their lost savings.

The anomaly stems from the current LTA structure, which values the pension at the point it starts and with the expectation that the pension will continue at the same rate, or increase until the year of death.

However, members under the scheme’s normal pension age (NPA) of 63 will see a 10 per cent reduction in their pension, possibly further due to a cap, while members over KPP2's NPA will not see their pensions reduced, but may see smaller future increases.

The scheme has over 11,000 members and a deficit of £1.5bn.

KPP2 chair of the trustee board, Nigel Moore, has written to Pensions Minister Guy Opperman, in the hope the current legislation can be reformed.

In the letter, dated 14 March, Moore wrote: “The trustee asks that the Department for Work and Pensions considers working with HMRC to amend the legislation to provide that where a member moves to the PPF, the percentage of the member's LTA which is used is recalculated to reflect the lower rate of pension the member will receive rather than the rate of pension the member has lost.

“If this results in the value of a member's benefits dropping below the LTA, the member should receive a refund of the tax they have paid on the benefits lost.

“We are not asking for anything more than a tax regime which allows members to help themselves and does not tax them on benefits they won't receive.”

The tax charge is an issue for any pension scheme that enters the PPF, however the issue is thought to be more pressing for a firm such as Kodak who have many high earning and long serving employees.

Royal London director of policy, Steve Webb, said: “It is bad enough that people miss out on their full pension because their employer went bust. But to then receive a tax bill on a pension they never received is to add insult to injury.

“Once again, a system is run for the convenience of HMRC rather than individual savers. There can be no justification of the present system and it is to be hoped that the government will make the necessary changes.”

When asked by Pensions Age if it has considered the PPF anomaly, a Treasury spokesperson said: “We want people to save into a pension, which is why we allow the majority of savers to make contributions tax-free.

"But we do have to get the balance right between encouraging saving and managing government finances, which is why we restrict tax relief available for the highest earners.

“Less than one per cent of pension savers – largely those with the highest earnings - face an annual allowance charge as a result of this policy.”

Quilter pensions expert, Ian Browne, said the issue looks like an “unintended consequence” of LTA legislation and PPF legislation interacting unexpectedly.

“To tax people as if they are receiving a pension when they are not seems like an odd quirk of the system especially if they want to receive that extra pension but can’t. This is not a situation where they have actively chosen not to receive it (i.e. defer it) for some benefit in the future,” he said.

“However, to tackle this problem will require new legislation, which is no easy task in the current climate when the government is trying to grapple with the Brexit deadlock leaving little parliamentary time for anything else.”

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