Devoted couple Garry and Debbie Ormiston have been together for more than 40 years, married for 36. On the whole, life has been good to them – two grown-up daughters that they are mighty proud of and four beautiful grandchildren aged between two and eight whom they dote on. They are as much in love now as they were when they first met as teenagers.
But their idyll has been cruelly disrupted with the news that Garry, 57, has just months to live. Cancer, which started in the lungs, has spread to his bones, stomach and spine. It is terminal and he has been told the clock is ticking.
Frustrated: A seemingly simple tax rule has caused anguish for Garry and Debbie Ormiston
Blood transfusions have not worked, while chemotherapy has been halted as it can do no more to combat the cancer raging through his body.
Since his terminal illness was finally diagnosed in June last year, Garry and Debbie, 56, have been frantically sorting out their finances so that when Garry does pass away, Debbie does not have any horrible financial gremlins to deal with.
As Debbie says: ‘We have done everything in life together. Right from the start, and it will be the case until the very end.’
But it is a financial journey that has left them bewildered, frustrated and angry. Despite being repeatedly told of their right to extract all of the money tax-free from Garry’s pension under serious ill-health rules, they have been thwarted by regulations that various pension experts describe as ‘daft’ and ‘cruel’.
Even Garry’s financial adviser and pension provider – Standard Life – have struggled to get to grips with the rules. They told him one moment that any payment would be tax-free but then did a U-turn and said it would be liable to tax at Garry’s highest marginal rate of income tax.
Debbie, a criminal law executive, who lives with Garry in Leyland, Lancashire, is so incensed that she has got her local MP to take up the cudgels. Seema Kennedy, Conservative MP for South Ribble, has a meeting scheduled later this week with John Glen, Economic Secretary to the Treasury, to press Garry’s case.
Debbie says: ‘All we want to do is use the money that Garry has put away during his working life now, before he dies, not afterwards.’
Garry’s wish is to use the proceeds from the pension to buy the home they have rented for nearly five years, thereby ensuring Debbie’s future is not plagued by worrying about paying rent.
But his wish is being thwarted by the fact that a hefty tax bill running into thousands of pounds would be payable on the disinvestment of his pension.
The bill would be avoided if they left the pension untouched until Garry died. Then Debbie could take the fund tax-free. However, they want to get sorted financially now.
The rules on the payment of a serious ill-health lump sum appear relatively straightforward – at first glance at least.
For a tax-free payment to be made, the claimant must not be in receipt of benefit from the pension scheme. They must also be aged under 75, while independent verification of their terminal illness has to be obtained from a medical practitioner. This must confirm they have less than a year to live.
The payment is tax-free provided it does not take a claimant over the so-called lifetime allowance, currently set at £1,030,000. Any surplus of pension payment above this figure is subject to tax at 55 per cent.
But confusion sets in when these rules are applied to someone who has taken some or all of their pension.
A tax-free serious ill-health lump sum can only be paid on what is called an ‘uncrystallised’ pension. Garry’s ‘mistake’, unintentionally made, was to turn his fund into a ‘crystallised’ one, thereby denying him a tax-free lump sum.
That decision was made two years ago, when he hit age 55. He took advantage of his right to use a process called drawdown, which allowed him to access only his tax-free cash and not lock himself into buying a poor value annuity – a process made easier and more popular by pension freedom rules introduced by the Government in the spring of 2015.
Like many people, Garry, who until recently helped his brother run an electrical contracting business in Preston, used his 55th birthday to take tax-free cash from his Standard Life pension. This is usually set at 25 per cent of the fund’s value.
But in taking the tax-free cash, he turned all of his pension pot into a crystallised arrangement. In so doing, he forfeited his future right to a tax-free serious-illness lump sum.
At the time, nobody – his adviser or Standard Life – warned him of this risk, though believing himself to be in rude health, Garry says he would have still made the same decision.
It was only last summer, after Garry’s diagnosis and while visiting a local hospice, that the couple learnt about the right to take a serious ill-health lump sum. Given the couple had already talked about buying the house they lived in, they thought this could be the answer.
Speaking to their financial adviser and Standard Life, they were led to believe that what they had been told was correct. So earlier this year, Garry gave instructions to Standard Life to disinvest his pension.
Yet, just before the money was due to be paid into Garry’s bank account, Standard Life informed their financial adviser that the payment would not be tax-free after all. It would be taxed as income. This is because of Garry’s decision to take tax-free cash just two years before. As a result the money was reinvested by Standard Life.
Since then, Debbie has been rattling cages. She has complained to the Financial Ombudsman Service and been to see Kennedy at her weekly surgery, culminating in the MP’s meeting with John Glen this week. Although she understands why the right to a serious ill-health lump sum has been denied, it does not change her view that the pension rules are unfair.
It is an opinion shared by pension experts. Tom McPhail, head of retirement policy at Hargreaves Lansdown, says the Ormistons are victims of a ‘cruel pension anomaly’.
He adds: ‘It forces a couple in an extremely distressing situation to put their lives on hold at the very moment when they know their time together will be brief.’
Claire Trott, head of pension strategy at financial consultants Technical Connection, says current pensions legislation is a mess, a result of it being written in piecemeal form.
She sympathises with the Ormistons, adding: ‘The rules appear unforgiving to those who get caught out by them. If Garry had taken just 10 per cent tax-free cash, 40 per cent of his pension would have been classified as crystallised and 60 per cent uncrystallised – and that 60 per cent could then have been extracted tax-free. Yes, pension law is sometimes an ass.’
How to protect your family if you are the breadwinner
For those worried about the financial implications of being struck down by a serious illness, or even dying, there are products to help households left without a breadwinner. They are all labelled protection insurance, but take many forms. All quotes are provided by London & Country.
For most families, life insurance is a must. It is often bought in tandem with a home loan and will ensure any mortgage is cleared upon death. Proceeds are tax-free.
The monthly premiums will not break the bank. For a non-smoking couple, both aged 35 and in good health, £200,000 of life cover for 25 years costs £17.49 a month from Legal & General (payable on first death) or £10.71 per partner if single policies are bought from AIG.
If the insurance is to dovetail with a capital repayment mortgage, where the debt falls over time, £200,000 of decreasing term assurance will cost just £13.17 a month, or £7.75 per partner, all from AIG.
Some versions of life cover pay a monthly income instead of a lump sum. This is often referred to as family income benefit. For our same 35-year-old couple, a joint policy paying an annual income of £30,000 for a maximum of 25 years (the clock starts ticking as soon as the policy is set up) costs £33.40 a month from Royal London. The income is tax-free.
Critical illness insurance
This pays out a pre-determined sum if the policyholder suffers a serious illness such as cancer, a heart attack or stroke. Any payout is free from tax. One of the best ways to buy cover is in tandem with life cover, but premiums are not cheap. Taking our 35-year-old couple, a life and critical policy set up on a joint basis would cost £111.54 per month through Zurich.
Instead of paying a lump sum, this cover provides an agreed monthly tax-free income in the event of long-term illness. It is paid until someone is able to go back to work or retires.
Many employers will pay this benefit if you die while on their payroll. It is tax-free and is usually between two and four times your annual income.