Should you pay tax on compensation paid in this scenario?

swingaloo2

A friend was badly advised re his pension and got a company involved trying to recover his money.
He was sucessful in getting a large lump sum and his pension (or what was left of it) is still with the original compny.The money they have sent him is just companesation for the amount he lost but it is a largish sum. Should he be paying tax on this money, he cant seem to find a difinitive answer.

NottinghamKnight

The normal outcome for a compensation payment is to put someone back in the position as if the error had not occurred, for pensions this would normally mean that it would be paid into the pension. Payments outside the pension would potentially be taxable.

dunstonh

Should he be paying tax on this money, he cant seem to find a difinitive answer.

Where the money is paid outside of the pension then tax is payable.  The reason being that if it was in the pension and then taken out, it would be taxed then.

If the payment is going to take him into higher rate or additional rate or lose his personal allowance then there is scope to make the case for a further amount to be paid to cover that.

swingaloo2

Thank you. The compensation money was paid as a lump sum into his bank and not into his pension pot.  He seems to be quite mixed up as something he and I read said that you will only be taxed any interest he should have paid tax on over the years his money was invested. There was also something about you have to pay tax if you still have the 'asset' and not if you dont. There again is confusion as he seems to think that there is still some money in the pension pot. He originally put 20.000 in and it had almost all gone. the company who now hold it told him he had 6000 left of his pot and he had requested it back and they had agreed to pay it back but at the same time he started the compensation claim so is now unsure if the compensation includes this 6000 or if the 6000 is still sitting there waiting to be claimed.  Such a mess and its hard to help him as he doesnt seem sure of his fcats. I think I will bow out gracefully. Thank you for the reply.

Marcon

swingaloo2 said:

Thank you. The compensation money was paid as a lump sum into his bank and not into his pension pot.  He seems to be quite mixed up as something he and I read said that you will only be taxed any interest he should have paid tax on over the years his money was invested. There was also something about you have to pay tax if you still have the 'asset' and not if you dont. There again is confusion as he seems to think that there is still some money in the pension pot. He originally put 20.000 in and it had almost all gone. the company who now hold it told him he had 6000 left of his pot and he had requested it back and they had agreed to pay it back but at the same time he started the compensation claim so is now unsure if the compensation includes this 6000 or if the 6000 is still sitting there waiting to be claimed.  Such a mess and its hard to help him as he doesnt seem sure of his fcats. I think I will bow out gracefully. Thank you for the reply.

Sounds a good idea, but perhaps as you bow, you might give him this link and they'll be able to help (free - and as you'll see they are emphatically not a sales organisation of any description): https://www.pensionsadvisoryservice.org.uk