Tax position re pension redress offer

izzybizzy

thanks blackreddennis for your reply. That helps to know that loss of tax credit cannot be considered as a consequential loss. As a single parent, currently unemployed, I would lose income benefit and tax credit, as well as one childs' educational bursary, so any cash payment, would be used up fairly quickly, even if it is not taxed. (I have been told that it is not taxed as income though). All the other items you mention, have also been mentioned in the pension redress calculation, except that it can be paid to me gross, as a non-tax payer.

I think it would be best to try to get it into a pension product, but don't know how to find a provider that will accept it, without applying tax relief at source, but even then, I will still likely be liable for the tax on pension contributions. Do you think this tax on pension contributions could be a consequential loss that should be added on to the payout? I don't mind a fight and in fact delaying the payment may give me more time to explore options. I cannot believe that the spirit of the legislation cannot be met - that is 'to put the pension holder back in the position that they should have been in, had the advice been correct'. thanks for input from anyone, as I can't find anyone with this specialist experience of pension redress tax!

TVAS

I did these letters on a contract last year and the 15% tax (basic rate) or 30% tax (higher rate). This was based on their financial assets and the time extrapolating if they would be a basic or higher rate tax payer in retirement.  

You are asking the wrong question. If tax has been deducted the company should pay that to HMRC and send you a tax deduction certificate. Ask them for proof that they have sent the tax to HMRC.

This is compensation. Compensation is not income so the compensation should not be added to your income and so no more tax is due NOW until you start taking benefits. 

Somebody has already said that the purpose of compensation is to provide indemnity this is a key insurance principle which means you must not be in a worse condition than you were before you received indemnity (compensation).

blackreddennis

There appears to be a number of different comments on mis selling of pensions, which include a number of different outcomes, having gone through it in detail my own comments are as follows. There is no underlying asset, there is a difference between compensation and redress, one pays you effectively saying sorry and the redress is reimbursing you to put you back to where you would have been had the mis sale not happened. The tax after your 25% free amount, notional tax is not reclaimable as this is the tax man taking his tax relief back that he gave you when it was added at the outset. You should then have compensation added which has income tax deducted from it, if your a non tax payer you should receive a tax certificate so that this amount can be reclaimed. The interest element on the compensation is added to your income when working out tax credits which could well mean you loose your benefits in the tax year you received your payment. Hope this clarifies some issues. 

izzybizzy

thanks TVAS and blackreddenis for your replies.
As far as I am aware it is a pension redress payment, for my pension being invested into funds which were inappropriate for my desired risk level. They have to make a payment to make up for the shortfall that has occurred versus a notional portfolio where appropriate risk funds had been used. There is a small amount of £1000 interest added in - 8% since calculation date and i am aware that is paid net and I could claim back the tax on the interest. They want to make the payment in cash, but say it might be possible to pay it into a pension product. I don't want the payment to be in cash, as it will cause me problems with means tested benefits, but the alternative of trying to get it reinvested in a pension is also problematic. Even if it can be done, I would have to pay 20% tax on any pension contributions greater than £2880 in any year., as a non tax payer. Could use previous years tax allowance too, but still liable for 20% tax on the other roughly  £64240, so around £12848 due in tax, I think. Trying to understand if this tax on pension contributions is a consequential loss, which they should pay, too? sorry, if I'm confusing things by mentioning both options of taking the cash payment or having them invest it in a pension, I'm also not sure if it would be the gross amount of roughly £70,000 or the initial net offer of roughly £60,000 that could be put into a pension product. Think it would be the gross 70,000 as it would then be taxed, if adding it as pension contributions, If it was to properly compensate me for the mistake, it would be added back into my pension, to raise my pension pot by 70,000, so I think the offer has to be raised by £12848 to cover the tax liability, as they are supposed to take account of the recipients individual situation and put them back in the financial position they should have been in! My financial advisor agrees that I should not suffer any financial disadvantage because of their mistake, but they say they are not liable for tax Do you have any thoughts on this? thanks so much.

blackreddennis

Hi Izzy
I am no expert but I think you will be paid a figure after the 25% tax free allowance is taken off then taxed at 20%. The compensation amount of £1000 or so is treated differently. I dont think you will get the redress tax back if taken as a cash payment as this is the tax man taking his tax relief back, I also don't think you will have success in claiming it as a consequential loss as their argument is it's nothing to do with them. As regards to moving forward, unless you have worked in the last 2 years, i don't think you can backdate the last 2 years at £2880, this is only allowed if you have taxable earnings up to £40k. Might I suggest you phase the money back in over future working years as you can pay in up to the amount of your salary. In the mean time you could put it in an ISA,  and unit trusts which like pensions go with the stock market. The problem is with your loss of tax benefits, in my case i was told tough and there was nothing i could do about it as the FCA appear to have missed this.
Sorry i couldn't be more help.

izzybizzy

thanks for your thoughts on this! I will try to push them to pay the tax liability on pension contributions, if it can be put back into a pension. Will update when it is sorted out!  cheers