Compensation and tax.

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.

How will a lump sum payment (possibly in the region of 15,000) be treated for taxation. Some elements of the compensation will be for inconvenience and the loss of a mortgage offer.

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2070

The ombudsman guidance isn't particularly helpful. Merely saying it is complex. Various articles allude to tax related issues but tend to fail to mention the what or the why.

I should be getting a callback from HMRC in due course, however previously they have tended to say "we don't give pre transaction advice". The problem is without reasonable idea of taxation consequence I cannot guage the level of compensation required.

I would hope it is non taxable (save for any interest element). If not any settlement is inequitable. Either the compensation is artificially increased beyond actual loss (unfair on the provider) or the net receipt is lower due to tax (unfair on me). 

In the alternative:-

a) It may be a capital gain. On reflection I don't think it is a zim-style right, but the compensation is derived from the ongoing diminuation of value of the pension asset (an issue I see with this is the pension isn't an independantly marketable asset).

b) Ombudsman decision have tended to reduce an award to 85%. This being based on the idea that had it run its course it would have eventually been 25% tax free and 75% taxable. It is not clear whether this is an actual deduction and a certificate provided or purely nominal (ie the payment is tax free in the members hands. If it were not tax free then not accounting for the members marginal rate looks unfair).

c) Some articles talk about a members marginal tax rate increasing as a result of compensation and a resultant tax bill. This can only occur if it is actual income. An issue then is whether the MPAA would apply (which would be a big problem).

Any clues or suggestions would be much appreciated.

Marcon

ASB1960 said:

As a result of maladministration delaying a pension transfer I am seeking compensation for the difference in value as a result of market movements.

How will a lump sum payment (possibly in the region of 15,000) be treated for taxation. Some elements of the compensation will be for inconvenience and the loss of a mortgage offer.

https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim2070

The ombudsman guidance isn't particularly helpful. Merely saying it is complex. Various articles allude to tax related issues but tend to fail to mention the what or the why.

I should be getting a callback from HMRC in due course, however previously they have tended to say "we don't give pre transaction advice". The problem is without reasonable idea of taxation consequence I cannot guage the level of compensation required.

I would hope it is non taxable (save for any interest element). If not any settlement is inequitable. Either the compensation is artificially increased beyond actual loss (unfair on the provider) or the net receipt is lower due to tax (unfair on me). 

In the alternative:-

a) It may be a capital gain. On reflection I don't think it is a zim-style right, but the compensation is derived from the ongoing diminuation of value of the pension asset (an issue I see with this is the pension isn't an independantly marketable asset).

b) Ombudsman decision have tended to reduce an award to 85%. This being based on the idea that had it run its course it would have eventually been 25% tax free and 75% taxable. It is not clear whether this is an actual deduction and a certificate provided or purely nominal (ie the payment is tax free in the members hands. If it were not tax free then not accounting for the members marginal rate looks unfair).

c) Some articles talk about a members marginal tax rate increasing as a result of compensation and a resultant tax bill. This can only occur if it is actual income. An issue then is whether the MPAA would apply (which would be a big problem).

Any clues or suggestions would be much appreciated.

Depends how any compensation award is structured. If it's paid into your pension (to make good the loss you claim you suffered as a result of the delay), then tax shouldn't be payable.

Inconvenience and disappointment awards are likely to be modest - typically £500 or £1,000 if you look at the tariff on the Pensions Ombudsman's website.

How does 'loss of a mortgage offer' relate to a pension transfer taking longer than you believe it should have taken? Are you claiming direct financial loss, or inconvenience/disappointment in relation to that?

ASB1960

Unfortunately any eventual award cannot be paid into the new pension. Annoying. There is a possibility that it could be paid into a different pension I have with the orignal provider.

I understand any eventual inconvenience claim will be modest (and not material either way from a point of view of taxation).

Provider 1 transferred the money to provider 2 however provider 2 had to return it because required information was not provided (this was information required for every transfer of this type under the transfer regulations, nothing in any way special). After several months the funds and information were resent and the transfer completed. During this period provider 1's view was that only a seperate small account was existant.

The claim related to mortgage arises because I was unable to provide proof of funds for income in retirement (despite requests for a statement or other documentary evidence provider 1 would not provide proof of funds) my existing lender would then offer no terms beyond my retirement age an alternative was arranged at higher cost. I believe this is a direct financial lost as a result of their behaviour.  Whether anybody ever agrees is a different matter.

Marcon

ASB1960 said:

Unfortunately any eventual award cannot be paid into the new pension. Annoying. There is a possibility that it could be paid into a different pension I have with the orignal provider.

If any award is paid to you rather than your pension scheme, and you pay tax on the amount you receive, do you have sufficient relevant earnings to pay it in to a pension scheme as a personal contribution, which should ensure you can get tax relief on the contribution? 

ASB1960 said:

The claim related to mortgage arises because I was unable to provide proof of funds for income in retirement (despite requests for a statement or other documentary evidence provider 1 would not provide proof of funds) my existing lender would then offer no terms beyond my retirement age an alternative was arranged at higher cost. I believe this is a direct financial lost as a result of their behaviour.  Whether anybody ever agrees is a different matter.

This might be rather trickier, both to prove loss and to establish the quantum of that loss.

Are you getting any help with all this? If not, there's an excellent source of free, impartial and expert support readily available: https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-problems

ASB1960

Unfortunately I don't have the spare pensionable income to pay a substantial further contribution. I could pay it in over a few years. I will check whether it is in itself pensionable income (very doubtful). However it will increase my marginal tax rate so I will still be behind overall if I can't contribute in the year of receipt 

I established the mortgage loss (both are 5 year fixes) by amortising both and taking the difference in payments made plus the difference in principle outstanding in 5 years (I intend to pay the balance in 5 years).

I agree it is difficult to establish this was a causal event, however lender 1 was prepared to offer a lower amount until retirement. This had higher payments than the agreement with lender 2, this demonstrates affordability until retirement but not beyond. Lender 2 demonstrates affordability (at least to them) on my projected pensions (they were prepared to accept the transfer quotation, lender 1 wasn't because it was not within 30 days).

This goes some way to evidencing cause. I was unable to take a drawdown to reduce the balance to satisfy lender 1 because the funds were not available at that time. (This would also have triggered the MPAA which I really want to avoid)

A counter argument may be that I could have just stuck with lender 1 until it was all resolved. However this would have left me exposed to rising rates against a backdrop of the BoE then forecast.

Given the Ombudsman (if it gets that far) will decide based on equity and balance of probability I think it is a case worth making.

I have not yet involved MAS, I will give this a try after I have had my call from HMRC (I hope I can now narrow the issues with them).

Thank you.

ASB1960

I got a callback with HMRC. She told me (barring any interest element) it is not taxable.