An employee received a voluntary severance package in 2012. The individual has now received correspondence from the company defined benefit pension scheme stating that the scheme is to be wound up. As the individual is over 50 years of age, he was offered the option of retiring and receiving his benefits early, as well as various transfer options.
The individual has queried why he was not given the option of receiving a tax free lump sum from the pension scheme, as some of his former colleagues had received this option.
On checking the calculation of the tax free portion of the employee's voluntary severance payment, it was discovered that the employee chose to avail of highest tax free amount available under the Standard Capital Superannuation Benefit (SCSB) calculation. This option involved the employee making a decision to give up his right to receive a tax free lump sum from the pension fund on retirement. As the pension scheme is being wound up now, he has the option of receiving his pension commencing immediately (as he is over 50 years of age), but he is not entitled to a tax free lump sum.
The reason that some of his colleagues received the option of a tax free lump sum is because they made a decision to retain their entitlement to a tax free lump sum from the pension scheme when their employment was terminated, hence this would have result in a higher portion of their severance package at that time being taxable.