Contribution based ESA and Compensation Lump Sum 14 October 2022 at 5:39AM edited 14 October 2022 at 5:44AM in Benefits & tax credits 3 replies 227 views

ASB1960

As a result of maladministration delaying a pension transfer I am seeking compensation for the difference in value as a result of market movements. When (and if) this is finally agreed it gives rise to a number of issues as to how it is paid and the consequences. These feed back to the level of compensation I will require so as not to be disadvantaged.

Ideally any amount would be paid to my new provider, however this is probably not possible as it was crystallised funds that were transferred.

I currently receive contribution based esa (support group). I also receive an annuity from an s226 policy (which is a bit over 85/wk) a pip and a group income protection payment (through payroll).

How will a lump sum payment (possibly in the region of 15,000) be treated for CB ESA "clawback".

I hope (perhaps optimistically) that it would fall to capital and not be subject to the 50/50 ruling. Is anybody able to confirm or otherwise ? [The guidance previously provided by calcotti would appear to exclude it from being income for ESA purposes]. If it were to fall to income how would I calculate the equivalent weekly amount and how long would it count for. In practice I would pay off debt with any lump sum.

This also gives rise to a number of follow ups (for which this might not be the right forum) as to HMRC treatment.

a) Would HMRC treat it as a capital gain? I have no other capital gains and therefore it shouldn't result in an actual liability.

b) Would HMRC treat it as taxable income? This would seem possible. It could, conceivably, push me into a higher tax bracket.

c) Would HMRC treat it as pension income? This would seem possible, if things had run their intended course it would eventually have been 25% tax free and 75% taxable. As well as the issues in b) It would trigger the MPAA for the next 5 years until retirement because pension contributions are made by my employer to an active scheme and I have an annuity in payment. (The future relief loss would actually exceed the likely compensation).

Thank you for any guidance.

calcotti

If it’s a compensation payment it appears to be capital which therefore has no impact on the ESA.

(If it was an arrears payment for a period of time it would be income over that period which would give rise to income for the weeks covered.)

For the tax questions you would be better asking on the cutting tax or the pension forum.

huckster

Agree with Calcotti, that such lump sums are capital and not income.

moedeeb

I had a recent compensation payment based on a delay in fund switching which the pension company simply managed by purchasing extra units in the funds to which I had switched. I assume that since I am in the same position I would have been had the mistake (delay) not happened then there are no implications to my declared pension contributions as in reality the compensation has addressed investment performance not input amounts.