Tax position re pension redress offer

SuttonMark

My wife was poorly advised in 1993 and moved her final salary benefits to a private pension. Her employers have agreed the advice was unsuitable and have offered a gross redress amount of around £222,000. They have used the FCA guidance (FG17/9) dated 27/10/2017 to calculate the redress.
Then they assume a 25% tax free sum would have been taken. This lower figure is then taxed at 20%, the 25% lump sum is added back and after some compensatory interest a net figure of £193,000 is arrived at.
This cannot be reinstated into a pension plan and has to be taken as cash.
We were concerned at the possible tax implications. We took some reassurance from advice on the Citizens Advice website which stated that compensation and interest for mis-sold personal pensions taken out between 29/04/1988 and 30/06/1994 was non-taxable but to be on the safe side we wrote to HMRC to explain the position. After two months they replied to suggest "Generally speaking the payment will form part of your taxable income and will be taxed in the usual way." My wife is not a tax payer but this suggests the net amount will be taxed at 40%.
This would see the £222,000 gross figure reduce to a net payment of around £119,000.
This seems very unfair and as the FCA state "the basic objective of redress is to put the customer, so far as possible, into the position they would have been in if the non-compliant or unsuitable advice had not been given."
We'd appreciate any advice or insight that other forum members can offer here.
Many thanks....

molerat

5. If it is not possible to pay the redress amount into the customer’s personal pension by augmentation, the redress should be paid in the form of a lump sum to the customer. This should be adjusted to take account of the customer’s individual tax position. Firms should be mindful of where the redress methodology already factors in tax, such as when considering pension commencement lump sums. A customer should not be left in a worse position at the point of being redressed as a result of the redress either being used to augment their personal pension or being paid as a lump sum. In calculating the redress amount, respondents should also take into account the customer’s wider circumstances so that they are not disadvantaged by receiving the redress payment.

Why could the redress not be paid into a pension scheme ? Are you sure the final figure has not been adjusted to account for any tax payable ?

SonOf

This seems very unfair and as the FCA state "the basic objective of redress is to put the customer, so far as possible, into the position they would have been in if the non-compliant or unsuitable advice had not been given."

When you draw on a pension, you pay tax. So, they are taxing up front what she would have been taxed on when she drew it. Albeit over a longer period. The only real difference here is that some of it would be taxed at 40%.

We were concerned at the possible tax implications. We took some reassurance from advice on the Citizens Advice website which stated that compensation and interest for mis-sold personal pensions taken out between 29/04/1988 and 30/06/1994 was non-taxable but to be on the safe side we wrote to HMRC to explain the position. After two months they replied to suggest "Generally speaking the payment will form part of your taxable income and will be taxed in the usual way." My wife is not a tax payer but this suggests the net amount will be taxed at 40%.

Pension redress used to go straight into the pension (hence why it was not taxed) but that was stopped. However, the interest element of the redress was much much lower back then too. It now gets paid out as cash and taxed as income on the 75%.

It may be worth contacting the complaints team that dealt with the redress calculation and make them aware that your wife will be paying 40% on the bulk of the pension whereas had it not been missold, it would have been 20% and that their redress calculation fails to take that into account. See what their response is to that.

sandsy

SonOf wrote: »

When you draw on a pension, you pay tax. So, they are taxing up front what she would have been taxed on when she drew it. Albeit over a longer period. The only real difference here is that some of it would be taxed at 40%.



Pension redress used to go straight into the pension (hence why it was not taxed) but that was stopped. However, the interest element of the redress was much much lower back then too. It now gets paid out as cash and taxed as income on the 75%.

It may be worth contacting the complaints team that dealt with the redress calculation and make them aware that your wife will be paying 40% on the bulk of the pension whereas had it not been missold, it would have been 20% and that their redress calculation fails to take that into account. See what their response is to that.

Yes, agree you should let the complaints team know. See also:

https://www.financial-ombudsman.org.uk/consumers/expect/tax

jaybeetoo

molerat wrote: »

Why could the redress not be paid into a pension scheme ?

If paid into a pension it would exceed the annual allowance.

jaybeetoo

SuttonMark wrote: »

My wife was poorly advised in 1993 and moved her final salary benefits to a private pension. Her employers have agreed the advice was unsuitable and have offered a gross redress amount of around £222,000. They have used the FCA guidance (FG17/9) dated 27/10/2017 to calculate the redress.

Are you are you've understood the compensation payment correctly? My wife has just received compensation and only a very small amount (the interest) is subject to tax. Her compensation letter explained this very clearly.

I think you need to check the compensation letter again and, if necessary, get advice from an accountant. My wife's compensation included a separate amount to pay for independent financial and/or tax advice.

SuttonMark

Thanks for these responses.
The employer have advised it is not possible to pay the redress amount into a pension.

The compensation payment has seen £33,000 deducted as a notional reduction for 20% income tax. I would agree that this would suggest tax has been paid but we gave the calculation to HMRC and as I explained they suggested "the payment..will be taxed in the normal way". I wrote to them again yesterday to query this as their own Savings and Investment Manual states that FA96/S148 exempts compensation received for mis-sold pensions from both income tax and CGT provided certain conditions exist. They do in my wife's case.

The employer has offered £1,800 towards using an IFA or accountant. We wanted to use this for an IFA but I accept we may need to spend it on tax advice. This is galling as surely HMRC should be able to clarify the situation as my wife's records are handled under self assessment.

jaybeetoo

From my wife's experience, I believe you only pay tax on the interest. Everything else should have been taken care of.

Your mistake was contacting HMRC!

blackreddennis

Hi M Sutton, I am keen to know your outcome as I am in an identical situation as your wife. The major bank paying me the redress will give no help, indeed they won’t even let me know what’s included in the redress calculation. Like yourself my concern is the income tax situation. I would appreciate your comments.

xylophone

I wrote to them again yesterday to query this

Which was exactly the right thing to do - telephone queries (especially where you are not speaking to an expert case handler but rather to  somebody fielding general enquiries)  can lead to misunderstanding and error. 

SuttonMark

blackreddennis said:

Hi M Sutton, I am keen to know your outcome as I am in an identical situation as your wife. The major bank paying me the redress will give no help, indeed they won’t even let me know what’s included in the redress calculation. Like yourself my concern is the income tax situation. I would appreciate your comments.

Hi,
It was a tortuous process but we finally received a response from HMRC. The sender drew our attention to the HMRC Savings & Investment Manual. The heading was SAIM2075 and stated "FA96/S148 and ESC A99 between them exempt compensation for mis-sold pensions, retirement annuities and free-standing AVC's from income tax where the necessary conditions are satisfied. The exemption extends to interest included in such payments." 
In our case the bad advice was given in the period between 29 April 1988 to 30 June 1994 which are the "necessary conditions" in line with the HMRC response. 
We were also paid some interest on the redress payment and I believe we will be able to claim this back. We have received a tax deduction certificate from the employers.
Hope this helps.