Upper Tribunal (Administrative Appeals Chamber)

IN THE UPPER TRIBUNAL                                                     Case No.  CPC/3971/2012

ADMINISTRATIVE APPEALS CHAMBER

 

 

1.         This is an appeal by the Claimant, brought with the permission of a Judge of the First-tier Tribunal, against a decision of a First-tier Tribunal sitting at Cambridge on 23 July 2012. For the reasons set out below that decision was in my judgment wrong in law and I set it aside. However, in exercise of the power in section 12 of the Tribunals, Courts and Enforcement Act 2007 I re-make the First-tier Tribunal’s decision by substituting a decision to the same effect as that which it made, namely that the Claimant’s appeal against the decision of the Secretary of State made on 7 September 2011 is dismissed. 

 

2.         I held an oral hearing of this appeal on 28 May 2014, at which the Claimant appeared in person and the Secretary of State was not represented. References in this decision to page numbers are to the Upper Tribunal bundle of documents (to which the letter to the Claimant from Phoenix Life dated 13 March 2014 has been added as pages 102-3).

 

3.         The issue in the appeal before the First-tier Tribunal was whether the Secretary of State was right, in calculating the Claimant’s entitlement to state pension credit, to add to his income with effect from 8 September 2011 a notional amount (£35.04 per week) in respect of additional income which he could have derived had he chosen to take benefits under a personal pension scheme at around that time, instead of waiting to take the benefits until his 65^th birthday on 14 August 2013, being the originally selected retirement age under that scheme.

 

4.         During the course of this appeal to the Upper Tribunal additional information as to the nature of the Claimant’s pension arrangements with Phoenix Life has been made available. As I have decided to set aside the First-tier Tribunal’s decision as wrong in law, and to re-make the First-tier Tribunal’s decision myself rather than remitting the matter to a fresh First-tier Tribunal for redetermination, it is convenient to proceed directly to make my own findings of fact and analysis of the effect of the legislation, and in the course of doing so to explain why the First-tier Tribunal’s decision was in my judgment wrong in law.

 

5.         The Claimant is a man who was born on 14 August 1948, and who therefore attained the age of 65 on 14 August 2013. He claimed state pension credit on 7 July 2011.

 

6.         He had a personal pension scheme with Phoenix Life which had a fund value as at 14 August 2011 of £32,143.02. It appears (pp.39 and 54) that this was in fact composed of three pension plans which had originally been taken out with Scottish Mutual in 1993, 1997 and 1998. He had ceased paying contributions under these schemes at some time prior to March 2010 (p.39). The retirement age which the Claimant had selected when commencing these schemes was 65. The rules governing the schemes are not in evidence, but it is clear from the letters from Phoenix Life dated 1 August 2011 (p.6) and 31 July 2012 (p.55) that the Claimant had the option of taking benefits under the schemes from age 55. The letter of 1 August 2011 began with the statement “it’s time to benefit from your pension”. It appears to have been written in response to a request by the Claimant as to his options at that time (see the opening words “I am pleased to provide you with a retirement pack as requested), and was clearly written in order to set out the position were he to take his benefits then. It makes clear that at that time (when he was nearly 63) he had the options of (i) buying an annuity from Phoenix Life (ii) buying an annuity from elsewhere (iii) transferring the value of the fund to another pension provider or (iv) delaying taking benefits until a later date (but not later than the age of 75).

 

7.         On 7 September 2011 a decision was made that the Claimant was entitled to state pension credit of £27.28 per week from 14 April 2011, but reducing to nil from 8 September 2011 by reason of a notional amount of income, in respect of his personal pension, of £35.04 per week (see the calculation at p.21).

 

8.         The Claimant disputed the attribution of a notional amount of income in respect of his pension, contending in essence that as his retirement age under the scheme was 65, he had not deferred anything or foregone any income. The First-tier Tribunal dismissed that appeal.

 

9.         The relevant statutory provisions are those in reg. 18(2) to (5) of the State Pension Credit Regulations 2002:

 

            “(2)       Where a person, who has attained the qualifying age, is a person entitled to money purchase benefits under an occupational pension scheme or a personal pension scheme, or is a party to, or a person deriving entitlement to a pension under, a retirement annuity contract, and –

 

                                    (a)        he fails to purchase an annuity with the funds available in that scheme where –

                                    (i)         he defers, in whole or in part, the payment of any income which would have been payable to him by his pension fund holder;

                                    (ii)        he fails to take any necessary action to secure that the whole of any income which would be payable to him by his pension fund holder upon his applying for it, is so paid; or

(iii)       income withdrawal is not available to him under that scheme; or

 

                                    (b)        in the case of a retirement annuity contract, he fails to purchase an annuity with the funds available under that contract,

 

            the amount of any income foregone shall be treated as possessed by him, but only from the date on which it could be expected to be acquired were an application for it to be made.

 

            (3)        The amount of any income foregone in a case to which either head (i) or (ii) of paragraph (2)(a) applies shall be the maximum amount of income which may be withdrawn from the fund.

 

            (4)        The amount of any income foregone in a case to which either head (iii) of paragraph (2)(a) or paragraph (2)(b) applies shall be the income that the claimant could have received without purchasing an annuity had the funds held under the relevant scheme or retirement annuity contract been held under a personal pension scheme or occupational pension scheme where income withdrawal was available and shall be determined in the manner specified in paragraph (3).

 

            (5)        In paragraph (2), “money purchase benefits” has the meaning it has in the Pension Schemes Act 1993.”

 

10.       In the present case the First-tier Tribunal held that the Claimant fell within reg. 18(2)(a)(i) in that when he originally took out the pension with a retirement age of 65 he “deferred” the payment of any income until 65. I do not agree with that analysis, for two reasons. First, as the Claimant has submitted, it is a nonsense to say that he deferred the payment of income when he originally decided to select the retirement age of 65. Secondly, the First-tier Tribunal’s analysis overlooks the need first to consider whether the claimant “fail[ed] to purchase an annuity with … funds available in that scheme”, which is a prerequisite in relation to all the three possibilities under reg. 18(2)(a). For that reason I must set aside the First-tier Tribunal’s decision as wrong in law.

 

11.       The crucial part of regulation 18(2) for present purposes is that which states that it applies where a person is “entitled to money purchase benefits under a personal pension scheme ….. and (a) he fails to purchase an annuity with the funds available in that scheme ….” The question is, does that apply where the beneficiary has not yet reached the retirement age which he originally selected, but has attained the age at which he could request that benefits be made available to him? In my judgment the answer to that question is yes. It is in my judgment clear that a person who has reached an age where he can require his personal pension fund to be applied in purchasing an annuity, or in providing other benefits, is “entitled to money purchase benefits” within the opening words of reg. 18(2).  (By section 181 of the Pension Schemes Act 1993 “money purchase benefits” means “benefits the rate or amount of which is calculated by reference to a payment or payments made by the member or by any other person in respect of the member and which are not average salary benefits”).

 

13.       In my judgment it is apparent from the context and from the references in reg. 18(2)(a)(i) and (ii) to income which is “deferred” and income which the claimant “fails to take any necessary action to secure”, that the purpose of reg. 18(2) is broadly to treat the claimant, for the purpose of calculating his entitlement to state pension credit, as possessing income in circumstances where he could require an annuity to be purchased or could require the income of his fund to be paid to him.  That includes cases where the selected retirement age can be altered, or (which usually comes to the same thing) benefits can be requested before the selected retirement age. In the light of the wording and purpose of regulation 18(2) as a whole, in my judgment a claimant “fails” to purchase an annuity, and funds are “available” to him in the scheme, if he has the option to purchase an annuity prior to his originally selected retirement date. There is no difficulty in saying that funds are “available” to a claimant who, simply by making a request to that effect, can require funds to be applied, before his originally selected retirement date, in buying an annuity. It is at first sight rather less obvious that such a person “fails” to purchase an annuity. In general the word “fails” connotes a breach of some obligation, or at least the failure to do something which a person is expected to do. But in this context it in my judgment means simply that the claimant does not purchase an annuity in circumstances where he could elect to do so. The rationale for regulation 18 is that, in working out what a claimant should be paid by way of state pension credit in order to bring his income up to the guaranteed minimum, a claimant should be treated as possessing income which he has foregone. Against that background it generally makes sense to regard the claimant as having “failed” to purchase an annuity in any case where an annuity could have been purchased but has not been. That analysis is in accord with the decisions of Mr Commissioner (as he then was) Jacobs in CIS/4080/2001 and CIS/4511/2002.

 

14.       It is arguable that the views which I set out in paras. 11 to 13 above require modification in a case where, under the rules of the applicable scheme, there would be (i) a financial penalty (in the sense of the fund value being reduced and/or the actuarial value of the benefits being lower) in the event of the claimant taking a pension at an earlier date than that at which it would otherwise have become payable or (ii) loss of some contractual benefit which can be obtained only by waiting to take benefits until the originally selected retirement age. In such a case it would in my view be less clear that a claimant who did not take his benefits early could properly be said to be a person who had “failed” to purchase an annuity with “funds available in that scheme”. The correct construction in that situation might be that, because the scheme is structured so that the full contractual benefit of the money purchase arrangements is obtained only by waiting until a particular age before benefits are taken, there are no funds “available” to him under the scheme, and he does not “fail” to purchase an annuity, until he attains that age. However, I have come to the conclusion that even in that sort of situation, a claimant would “fail” to purchase an annuity by not exercising the legal right to do so. My reason for so concluding is that reg. 18(2)(a) really covers two types of plan, namely those where “income withdrawal” is available under the plan, and those where it is not. The former type are dealt with in reg. 18(2)(a)(i) and (ii), and sub-clause (ii) applies where the claimant “fails to take any necessary action to secure that the whole of any income  which would be payable to him by the pension fund holder upon his applying for it, is so paid.” That language seems to me to indicate that it applies whenever income could be applied for, however financially disadvantageous the consequence of doing so may be. If that is right in a case where income withdrawal is available, it seems to me to indicate that the same should apply where an annuity is not purchased in a case (such as the present) where income withdrawal is not available.

 

15.       In my judgment, therefore, and regardless of the financial consequences in the present case of taking benefits before the originally selected retirement age, the decision maker and the First-tier Tribunal were correct in deciding that the Claimant’s state pension credit award fell to be reduced.

 

16.       However, as the contrary is arguable, I shall go on (in paras. 17 to 27 below) to consider the position on the footing that my conclusion in para. 14 above is wrong and that on the correct construction of reg. 18 there could be at least some situations where financial penalties, or loss of benefits, in the event of benefits being taken early mean that the claimant would not “fail” to purchase an annuity by not doing so early. For the reasons given in paras. 17 to 27 I conclude that, even taking into account the terms of the Claimant’s schemes and the financial consequences of taking benefits early, the Claimant did “fail” to purchase an annuity with funds “available”.

 

17.       The Claimant referred in his letter of 17 October 2011 (p.2) to the reduction in the amount of the pension which he would suffer if he were to take it some 2 years early. He said that he had been told that, although he could at that time apply to take his pension, “it would result in my losing thousands of pounds and greatly reduce the weekly amount I am entitled to receive from age 65.”  The letter from Phoenix Life dated 1 August 2011 referred to a “market value reduction” (MVR) which may be applied if the funds are invested in the With Profits Fund, as opposed to unit linked funds. On the second page of the letter it was stated that “the only times we guarantee that we will not apply an MVR is on your selected retirement date or on death.”

 

18.       One would of course expect that, other things being equal, a given fund would purchase a smaller annuity at 63 than at 65, because the annuity will have to be in payment for 2 years longer. However, that reduction does not of course mean that the annuity payable from 63 would be worth less, in actuarial terms, than the annuity payable only from 65. On the assumption that no further contributions are being paid, one would expect the actuarial value to be the same. The mere fact that the pension would be smaller on this ground is in my judgment not therefore something which a claimant could rely upon in support of an argument that he did not “fail” to purchase an annuity.

 

19.       I requested the Claimant to obtain additional information from Phoenix Life as to the terms of the policies, and the amounts payable, and in particular whether there was any market value reduction or other penalty imposed in the event of a pension being taken earlier than the originally selected retirement age. The further information which Phoenix Life have helpfully provided is in letters dated 29 January 2014 (p.95) and 13 March 2014 (p.102).

 

20.       The total value of the funds if taken at 14 August 2011 would have been £32,143.02. The total value of the funds at 14 August 2013 was £36,094.71. The overall increase in value was therefore £3,961.69.

 

21.       The position in relation to each of the 3 plans was as follows.

 

Plan 1323526

This was invested in a unitised with-profits fund.

 

At 14 August 2011 the units were worth £19,122.01, to which would have been added a terminal bonus (at the rate of 2.8%) of £535.42, making £19,657.43 in total.

 

At 14 August 2013 the units were worth £20,752.75, to which was added a terminal bonus (at the rate of 17.9%) of £3,714.74, making £24,467.49 in total.

 

Phoenix Life specifically confirm that “the increase in fund (sic) in this plan was due to an increase in terminal bonus rate and an increase in the unit price”, and that there would have been no market value reduction or other penalty if benefits had been taken in August 2011.

 

Plans 1458318 and 1478416

These were invested in unit linked funds.

 

At 14 August 2011 the fund values were £6,777.40 and £5,708.19 respectively, giving a total value at that date of £12,485.68.

 

At 14 August 2013 the fund values totalled £11,627.22.

 

Less in total would therefore have been payable in respect of these plans at the later date. Phoenix Life specifically confirm that this was because the unit prices had fallen. They further confirm that no market value reduction or other penalty would have been applicable in August 2011.

 

22.       In summary, therefore, the overall value would have been greater by 2013, largely because of the substantially greater rate at which terminal bonus would by then have been added in the case of the unitised with-profits fund. There had also been some increase in the values of the with-profits units during that period.

 

23.       Information is available on the Phoenix Life website as to the addition of annual and final bonuses to former Scottish Mutual unitised with-profits policies: see http://www.phoenixlife.co.uk/~/media/Files/T/The-Phoenix-Life/pdf/with-profits-info-sheets/Info_SM_UWP.pdf. It appears that annual bonuses are applied as an increase in the with-profits unit price. My understanding is further that the rates of annual and final bonus are determined primarily by reference to the movements in the market values of the underlying assets from time to time. The letter from Phoenix Life at p.7 of the papers confirms that “a final bonus aims to ensure that when a policy that is wholly or partly invested in a with-profits fund is surrendered, the policy value is not unfairly lower than the policy’s share of the underlying value of the fund’s assets. We regularly review our final bonus scale, therefore a final bonus is not guaranteed as the scale may be changed at any time, without notice.”

 

24.       In short, therefore, it is not the case that the Claimant would have been subject to any penalty by taking his benefits at 63 rather than at the originally stipulated retirement age of 65. He was permitted to take benefits earlier without penalty. To put the same point another way, the benefits which he would have obtained at 63 would have been no less than if he had specified 63 (and not 65) as his retirement age at the time when he originally started the plans.

 

25.       It is true that the overall fund value at 65 was, as matters turned out, greater than it would have been if he had taken benefits at 63. That was primarily because, in the case of the largest of the three funds, (i) annual bonuses were added so as to increase the value of the units and (ii) the rate of final bonus increased substantially. It is further true, I think, that in the case of a with-profits fund, where by definition the managers seek to smooth out the effects of changes in the market values of the underlying assets, one can be reasonably confident that the units will have annual bonuses added, and therefore that the unit values will increase if benefits are taken later rather than sooner. However, that is really no more than reward for the funds remaining invested for longer. But the Claimant had no contractual entitlement, as at August 2011, to either the addition of any rate of annual bonus during the next 2 years or a higher rate of terminal bonus in 2013 than would have been paid in 2011. What he would have lost by taking benefits in 2011 would have been merely the opportunity to earn additional bonuses. But that potential loss did not in my judgment enable him to say that in deciding not to take the benefits he had not “failed to purchase an annuity with the funds available in that scheme”. If the funds were available to him at 63 without penalty and without loss of some contractual entitlement obtainable only by waiting to take benefits until a particular age, he in my judgment failed to purchase an annuity with the funds available, notwithstanding that by leaving them untouched until the originally selected contractual retirement date they could have been expected to increase in value by the addition of annual bonuses, reflecting investment return on the underlying assets. Further, any increase in unit values as a result of the addition of annual bonuses may be more than wiped out by a reduction in the rate of final bonus.

 

26.       If the Claimant had elected to defer taking benefits beyond 65, he could equally have expected unit values of the with-profits fund to continue to rise. But the fact that that would have been the case would not have permitted him to say, for state pension credit purposes, that he should not be treated as being in receipt of notional income equal to the amount of pension which he would have received had he taken benefits at 65. On the evidence as to the terms of the policies in the present case there is no difference of principle, as far as the application of reg. 18 is concerned, between (i) the situation where the Claimant waited until his selected retirement age to take benefits and (ii) the situation which would have obtained if he had decided to change his retirement age to (say) 67. The answer to the question whether the Claimant was required by reg. 18 to be treated as possessing notional income at 63 (in the first case) and 65 (in the second case) would have been the same.

 

27.       Since the hearing before me the Claimant has submitted a letter from Justretirement (from whom he purchased an annuity with the available funds) dated 8 August 2013 which states as follows:

 

            “Phoenix have contacted us to confirm that the policy 1323526 has a maturity date of 14 August, therefore if funds are released before this date a penalty will incur of £122.09. If the funds are released on or after 14 August this charge will no longer apply.”

 

Without additional evidence as to precise the reason for this “charge”, I am unable to attach any significance to this evidence. It may mean no more than that the unit value or the terminal bonus would have been slightly lower because the funds would have remained invested for a slightly shorter period. In any event, it does not demonstrate that there would have been any penalty in the event of an annuity being purchased in August or September 2011. In view of my primary conclusion, set out in para. 14 above, that it makes no difference even if there would have been such a penalty, I do not consider it sensible to delay this decision even further by requesting the Claimant to obtain further evidence from Phoenix as to the basis of the “penalty” or “charge” referred to in the letter from Justretirement.

 

28.       I agree with the analysis of the Secretary of State’s representative in this appeal that the applicable provision in this case was reg. 18(2)(a)(iii) of the 2002 Regulations. Sub-paras. (i) and (ii) were not applicable because they apply where income withdrawal is available under the terms of the scheme, and income withdrawal was not one of the options indicated by Phoenix. That means that, as submitted by the Secretary of State, the amount of income foregone, for state pension credit purposes, is to be determined in accordance with reg. 18(4) – i.e. “the income that the claimant could have received without purchasing an annuity had the funds … been held under a personal pension scheme…where income withdrawal was available and shall be determined in the manner specified in paragraph (3).” Para. (3) provides that the amount of income foregone shall be “the maximum amount of income which may be withdrawn from the fund”. The amount which may be withdrawn from the fund is not necessarily the same amount as (and indeed I think will normally be higher than) the amount of the annuity which could be purchased with the capital sum available.

 

29.       The submission on behalf of the Secretary of State in this appeal states that the decision under appeal to the First-tier Tribunal was based on “an estimate of the amount of income that would be available to the claimant if he purchased an annuity with his pension fund”. As I have said, that would have been wrong, but I am not sure, looking at the wording of the decision at p.21, whether that is what the Secretary of State in fact did. That decision stated that the calculation, which resulted in notional additional income of £35.04 per week, was of “the foregone income to the maximum amount which may be withdrawn from the fund”. I am not sure precisely how the Secretary of State arrived at its figure. The Secretary of State’s submission invited me, on the

 

footing that further findings of fact as to the correct amount of notional income are necessary, to remit the appeal to a fresh First-tier Tribunal. However, in a provisional decision which I provided to the parties in draft at an earlier stage of the appeal, I indicated that I was not minded to do that, because it seemed to me very likely that the amount of income foregone, properly calculated in accordance with reg. 18(4), would have reduced the Claimant’s state pension credit entitlement to zero. The Claimant has not, pursuant to the invitation which I gave in the Direction which accompanied my draft decision, provided any material which enables me to say that the calculation performed by the Secretary of State is wrong. In any event, unless the notional additional income were less than £27.28 per week, it would not help him because his state pension credit entitlement will still have been nil. The decision which I substitute in paragraph 1 above is therefore simply to dismiss the appeal.

 

30.       I emphasise that this is not of course a decision that the Claimant was required by law to take his pension at 63. It is entirely up to a claimant whether he takes his pension or not. Regulation 18 provides merely that, if he does not, a notional income is attributed to him.

 

31.       The Claimant submits that, the DWP having relied upon the wrong provision of reg. 18(2) (as shown by the reference in its reconsideration decision at p.21 to his having “chosen to defer the payment of income” – apparently a reference to reg. 18(2)(a)(i)), it cannot be permitted to rely on another provision of that regulation. However, that is not the correct approach. The DWP having decided that the Claimant was not entitled to state pension credit by reason of notional income, the First-tier Tribunal’s task, and therefore my task in re-making the First-tier Tribunal’s decision, is to decide whether the DWP’s outcome decision was right. If (as I hold) it was right for the wrong reason, then the appeal against the DWP’s decision must be dismissed. The task of a First-tier Tribunal on an appeal against a social security benefit decision is to decide the claimant’s correct entitlement, and not simply to decide whether the DWP proceeded under the correct provision and (if it did not) simply to set aside the DWP’s decision. The analogy which the Claimant seeks to draw with a criminal indictment is not apt.

 

32.       In his submissions in reply in this appeal the Claimant contended that his application was for working tax credit (WTC), not state pension credit. He told me at the hearing that he applied for JSA and was advised that he should apply for WTC and that this is what he thought that his application (apparently made by telephone) was for, and that that was what he thought he had been awarded when payments arrived in his bank account. However, I can only proceed on the footing that his claim was treated as being for state pension credit, and that the decision under appeal to the First-tier Tribunal was in respect of state pension credit. It may be that the Claimant misunderstood the position, but that cannot affect the matter. The decision on the claim was made by the DWP. WTC is administered by HMRC. If the claim had in fact been for WTC, then the DWP’s decision would have a nullity (there cannot be a valid decision on a claim which has not been made), as would have been the Claimant’s purported appeal to the FTT, and the FTT’s decision (and also this decision).

 

 

 

 

 

 

Charles Turnbull

Judge of the Upper Tribunal

10 June 2014