Service Pensions: Taxation (Hansard, 29 April 2002)

§ Lord Bach

Since the statement of my honourable friend the Parliamentary Under-Secretary of State for Defence (Dr Moonie) on 23 January this year, (Official Report, columns 891–902) in another place, the Armed Forces Personnel Administration Agency has been conducting a review to establish more clearly the exact extent of the problem with the mistaken taxation of service invaliding and attibutable pensions. This work is not complete but has revealed that some Royal Navy invaliding and attributable pensions awarded between 1973 and 1999 have also been mistakenly taxed. We will be reviewing all the case files of those who might have been affected and arranging for refunds to be made as appropriate. This will be done as quickly as possible but is expected to take some months given the need to review several thousand pension files. We will also be providing appropriate national publicity to allow those who think they might have a claim to apply for a tax refund.

Our research has not so far revealed any cases where Royal Air Force pensions were wrongly taxed and there is evidence that the RAF has had in place checks which would have uncovered cases where attributable pensions should have been exempt from tax. However, we will include the RAF in our continuing work to ensure that no error is left unidentified.

Our further work to date has confirmed that the problem was more extensive than originally understood but has also shown the complexity of the issues involved as over time changes have been made to the organisations responsible for administering the pensions and to the rules governing the schemes. We have therefore concluded that we should set up an internal review, completely independent of the staffs involved, to establish the precise extent of the current problems and to expose any other problems that may exist. This independent review will look across all three services, be launched as soon as possible and is likely to take a number of months to complete. The review team will be headed-up by a senior civil servant and consist of staff drawn from the Defence Internal Audit. In order to provide external confidence, the NAO will be invited to validate the procedures. We will report the findings to the House.