I have potentially lost thousands by failing to understand my pension

spencyrrh

Summary of my problem

Briefly, I worry my misapprehensions of UK pension arrangements may have lost me hundreds, and possibly thousands of pounds, in pension contributions, by becoming self-employed but continuing to contribute to my previous pension. This may be legally my fault, although I doubt many reasonable people would blame me for my actions.

Background

In more depth, I am 32, self-employed and have a low income. In 2016, I enrolled in a relatively generous workplace pension scheme through Scottish Widows with my then-employer. I was a basic rate taxpayer. I contributed over £300 every month, and enjoyed tax relief and an employer top-up.

In 2018, I quit my job and became self-employed. My income has varied, but dropped below the income tax threshold during the pandemic, and has not yet crept back up above it. I have been fortunate enough to be able to contribute regularly to my pension through a monthly Direct Debit from my current account, which I understand became a 'private personal pension' when I went self-employed. Since that moment, I have received no employer contribution (obviously) and no tax relief. I obviously lamented losing those benefits, but I thought I had no choice but to accept greatly reduced pension growth.

In 2022, I decided I wanted to transfer my pension pot, which is now around £10,000, an amount I consider modest but healthy for my circumstances, to a new provider. This move was motivated not by my plan's performance (which has been no worse over the last 18 months than many other plans), but by the poor customer service and consumer choice I receive from Scottish Widows. In 2021, they terminated my online statements. In 2022, they have railroaded me to a new call centre service with long wait times. My romantic partner is also a Scottish Widows customer, but still enjoys better customer service. The only way I can check my pot's current value is in the Scottish Widows smartphone app, which doesn't show my contribution history, details of my plan, or even my estimated outcomes. I elected instead to move to PensionBee, which charges an annual fee of 0.50% of the pot value. Scottish Widows offered a 'free' service, but I calculated that this cost is tolerable to me, as it is less than I contribute in a month.

How I became confused

PensionBee's customer service and transfer process have been relatively straightforward and transparent, although there is a wait time. I am so far pleased with what they offer. However, I hit a problem when I tried to contribute to my new pot with the new provider. Using the PensionBee smartphone app, I am forced to agree that I am 'eligible for tax relief on my pension contributions'. I make about £9,000 a year at the moment, so am under the income tax threshold. I thought that meant I was not eligible for tax relief, so I became worried that I would either not be allowed to contribute to my new pot, or that if I did contribute, I would be committing pension fraud.

I contacted PensionBee, who insisted I am still eligible for tax relief. Having checked online, it doesn't seem like there is much thought given to communicating this to low earners, presumably because it is assumed they will not make contributions. My lay understanding though is that they were correct. This made my head spin. It suggested to me that I could have been getting tax relief on my monthly contributions going back to late 2018, when I first became self-employed. Given the number and size of my contributions, and the compound interest involved, I have probably lost a few grand of accumulation if this is all true. I started to wonder how this could have happened. How is someone who goes self-employed supposed to know this?

I read up a bit more, and tried to come up with a 'simplest' explanation: that perhaps everything which has happened to me could be financially and legally legitimate, and that the reasonable explanation was simply 'nobody is paying attention to this kind of eventuality'. Using this approach, I theorised that the relevant explanatory distinction is between 'relief at source' tax relief calculations and 'net pay' ones. I think it must be that my private personal pension with Scottish Widows was still calculated using net pay, as it had been when I was contributing through my employer within a PAYE scheme. PensionBee uses a 'relief at source' calculation, so I guess the top-up I am promised from them must be legitimate.

My questions

Thank you for reading all this so far. Obviously, I am thrilled that I get 25% of my contributions added into my PensionBee pot from now on. However, I am frustrated that I seem to have been effectively cheated out of that cash by my ignorance for over four years. Can I claim tax relief income back from HMRC somehow? Is Scottish Widows in any way at fault? Or should self-employed people be prevented from contributing in such rubbish terms to a prior workplace pension which is no longer cost-effective for them?

I would appreciate any advice you can offer me. Given that the value of my pot is £10,000, my income is approximately £9,000pa, and my monthly contributions are about £100 per month, what I have potentially lost may be considered small, but it is of great significance to me, especially as I do not stand to inherit wealth, am a private renter, and worry about the long-term protections for the State Pension. If nothing else, has there been any discussion anywhere about the pitfalls of going self-employed for those who have workplace pensions and want to keep contributing? Is there any restitution for those who have made mistakes?

Albermarle

Firstly in general you have pretty much fully worked out what has happened correctly. So well done for that because it can be a bit of a minefield

You were entitled to tax relief on your SW contributions ( what Pension Bee says is correct ) but they had continued to treat the contributions as net pay, as presumably nobody told them otherwise.

Normally the way forward would be to get SW to sort it out, but as you are no longer a customer, that will be difficult.
I do not think HMRC could do anything, so you may be stuck, but wait for other posters to comment.

xylophone

Have a look at this.

https://www.litrg.org.uk/tax-guides/tax-basics/do-i-have-join-pension-scheme/do-you-know-how-tax-relief-your-pension#:~:text=Non-taxpayers (that is,,get 40% pension tax relief

In brief, a  person aged under 75 with no relevant earnings at all may still contribute (or have contributed on his behalf) a  up to net £2880 to a personal pension (relief at source) and the pension provider will claim tax relief of up to £720 and add it to his pot.

The gross contribution is therefore £3,600.

A person aged under 75 with gross relevant earnings over £3,600 and up to £40,000 may contribute up to his net relevant earnings to a personal pension (relief at source) and receive the appropriate tax relief.

Let's take John who is aged 18 and whose only income is his salary from a part time job which brings in £10,000 a year.

He can make a net contribution of up to £8000 to his personal pension and receive tax relief of up to £2000, even though he pays no tax.

Let's take Daisy whose only income is her salary of £40,000 a year.

She has no expenses because her spouse earns more than sufficient to meet the bills.

She decides to make a net contribution of £32,000 to her personal pension and receives tax relief of £8000 which the provider will claim and add to her pot.

Details of "relief at source" and "net pay" are given in the link above.

Presumably when you were employed you earned in excess of the personal allowance - tax relief on your contributions was achieved either through "net pay" or "relief at source" - see link.

You say that when you left the company, the pension became just a personal pension and you continued to make personal contributions.

You should have received tax relief on those contributions as described above.

Has SW said that no tax relief was claimed on this personal pension?

dunstonh

In 2018, I quit my job and became self-employed. My income has varied, but dropped below the income tax threshold during the pandemic, and has not yet crept back up above it. I have been fortunate enough to be able to contribute regularly to my pension through a monthly Direct Debit from my current account, which I understand became a 'private personal pension' when I went self-employed. Since that moment, I have received no employer contribution (obviously) and no tax relief. I obviously lamented losing those benefits, but I thought I had no choice but to accept greatly reduced pension growth.

The word "private" personal pension has no meaning.  Some people refer to private pensions as being any type of pension other than state pension.   Some refer to private pensions being any type other than state or occupational.   It doesn't really matter.     Your SW pension was probably either a group scheme that moved to indivdual or an auto-enrolment scheme that moved to individual but they work exactly the same way.     There hasn't been a type of pension specifically for the self employed for several decades.   

However, I hit a problem when I tried to contribute to my new pot with the new provider. Using the PensionBee smartphone app, I am forced to agree that I am 'eligible for tax relief on my pension contributions'. I make about £9,000 a year at the moment, so am under the income tax threshold. I thought that meant I was not eligible for tax relief, so I became worried that I would either not be allowed to contribute to my new pot, or that if I did contribute, I would be committing pension fraud.

You get tax relief upto £9000 in your case (100% of your earnings).  There are limits but you are nowhere near them.

I contacted PensionBee, who insisted I am still eligible for tax relief. Having checked online, it doesn't seem like there is much thought given to communicating this to low earners, presumably because it is assumed they will not make contributions.

The pension rules are available and published, should you choose to read them.

It suggested to me that I could have been getting tax relief on my monthly contributions going back to late 2018, when I first became self-employed. 

Correct. The current contribution rules were introduced back in 2001.   The limits have been tweaked over the years but your scenario would have worked back as far as that.

Given the number and size of my contributions, and the compound interest involved, I have probably lost a few grand of accumulation if this is all true.

There is no compount interest involved.  And, ironically, due to 2022 being a negative year, you are not far off 2018 values.  So, any losses are going to be limited.

I started to wonder how this could have happened. How is someone who goes self-employed supposed to know this?

Your IFA or your accountant are often the main places or yourself if you decide to read up on it.

Thank you for reading all this so far. Obviously, I am thrilled that I get 25% of my contributions added into my PensionBee pot from now on. 

Whilst you have the correct percentage, tax relief is a deduction, not an addition.   Pensions are worked out on a gross basis.  So, you get 20% relief of the gross contribution.   That may seem like semantics but many people make the mistake of thinking the pension contribution is the direct debit amount when it is not and that can lead to trouble with HMRC.

However, I am frustrated that I seem to have been effectively cheated out of that cash by my ignorance for over four years. Can I claim tax relief income back from HMRC somehow? 

No.  Although you can start catching up.   You can pay £9000 gross into a pension and get tax relief.  you can also pay £4000 into a LISA.  The bonus rate is equivalent to basic rate relief on a pension.   So, that is £13k a year.    It wouldnt take you long to catch up if you have that money already put aside.

 Is Scottish Widows in any way at fault? 

No.  They are a provider.  They do as they are instructed by you or your adviser.

Or should self-employed people be prevented from contributing in such rubbish terms to a prior workplace pension which is no longer cost-effective for them?

Why do you think it is not cost effective?   As far as you are concerned there is no difference in the product terms of the SW pension or Pensionbee or any other type money purchase scheme available to you.  The same rules apply.

If nothing else, has there been any discussion anywhere about the pitfalls of going self-employed for those who have workplace pensions and want to keep contributing?

Your accountant or your financial adviser or your bank manager (less so nowadays) or any of the support services available or the internet are all places for information about the pros and cons.

Is there any restitution for those who have made mistakes?

No. 

penners324

You need a breakdown of your contributions to SW. They may well have been adding the tax onto your account. That is the standard way of doing it

Marcon

spencyrrh said:

My questions

Thank you for reading all this so far. Obviously, I am thrilled that I get 25% of my contributions added into my PensionBee pot from now on. However, I am frustrated that I seem to have been effectively cheated out of that cash by my ignorance for over four years. Can I claim tax relief income back from HMRC somehow? 

You haven't been cheated, so it's important to recognise that now, if only to ensure you stop feeling upset and hard done by when the position should be perfectly capable of resolution. 

Or should self-employed people be prevented from contributing in such rubbish terms to a prior workplace pension which is no longer cost-effective for them?

It's unusual for contributions to a personal pension (and I'm assuming that you were in some sort of group personal pension arrangement with your last employer??) to be made from net pay, so suggesting that self employed people should somehow be 'prevented' from contributing to a prior workplace pension on what you describe as 'rubbish terms' is rather wide of the mark. Are you absolutely sure that's how it was done - and are you sure SW didn't credit you with the tax top up?

I elected instead to move to PensionBee, which charges an annual fee of 0.50% of the pot value. Scottish Widows offered a 'free' service, but I calculated that this cost is tolerable to me, as it is less than I contribute in a month.

Given the number and size of my contributions, and the compound interest involved, I have probably lost a few grand of accumulation if this is all true. 

Unlikely that SW offered a free service - costs will have been deducted from your pot.

Given the dramatic movements in markets, it's quite possible that you haven't actually lost anything by not having your funds invested (but impossible to know for certain without knowing where they would have been invested).



In short, all that's gone wrong here is you've not ticked a box when your status changed from employee to self employed - and it can be sorted out, probably via an approach to HMRC. You can claim back up to four years after the end of the tax year your claim relates to. Get some free, expert help to do so: https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-problems

spencyrrh

Wow, what a sudden onslaught of responses! Thank you to everyone who took the time to get back to me. I have my next course of action.

In short: it all looks as though I may be mistaken. If Scottish Widows really did give me tax relief, but I just got myself confused about it, then all that's happened is that I've learned a little more about pensions, with all of your help. If not, then I hope I may be able to claim that tax relief back.

Albermarle said:

Firstly in general you have pretty much fully worked out what has happened correctly. So well done for that because it can be a bit of a minefield

You were entitled to tax relief on your SW contributions ( what Pension Bee says is correct ) but they had continued to treat the contributions as net pay, as presumably nobody told them otherwise.

Normally the way forward would be to get SW to sort it out, but as you are no longer a customer, that will be difficult.
I do not think HMRC could do anything, so you may be stuck, but wait for other posters to comment.

Thank you for your response. I really appreciate your patience, especially when compared to some of the comments below.

As my pension provider transfer is not yet complete, I suspect I may technically still be a Scottish Widows customer. I will look into contacting them about my potentially missing tax relief.

xylophone said:

In brief, a  person aged under 75 with no relevant earnings at all may still contribute (or have contributed on his behalf) a  up to net £2880 to a personal pension (relief at source) and the pension provider will claim tax relief of up to £720 and add it to his pot.

[...] A person aged under 75 with gross relevant earnings over £3,600 and up to £40,000 may contribute up to his net relevant earnings to a personal pension (relief at source) and receive the appropriate tax relief.

[...] You say that when you left the company, the pension became just a personal pension and you continued to make personal contributions.

You should have received tax relief on those contributions as described above.

Has SW said that no tax relief was claimed on this personal pension?

Thank you for referring me to the relevant information which indicates I am entitled to tax relief on my contributions. I was not aware of this before transferring to PensionBee, but am now.

I can't recall having a conversation with Scottish Widows confirming that they gave me no tax relief, but I will be contacting them about it. Evidently, if they added the tax relief silently, then all is well.

dunstonh said:

The word "private" personal pension has no meaning. [...] There hasn't been a type of pension specifically for the self employed for several decades.   

[...] The pension rules are available and published, should you choose to read them.

There is no compount interest involved.  And, ironically, due to 2022 being a negative year, you are not far off 2018 values.  So, any losses are going to be limited.

[...] Your IFA or your accountant are often the main places or yourself if you decide to read up on it.

[...] That may seem like semantics but many people make the mistake of thinking the pension contribution is the direct debit amount when it is not and that can lead to trouble with HMRC.

[...] Why do you think it is not cost effective?   As far as you are concerned there is no difference in the product terms of the SW pension or Pensionbee or any other type money purchase scheme available to you.  The same rules apply.

It is of no moment to my current dilemma whether or not there is a self-employed pension. With respect, your claims about the compound interest on my pension plan are speculative. I concede it has been a lean period for growth, but my pot has grown in value due to accumulated interest at points during my contribution period.

As I have said, I cannot afford an accountant or financial adviser. I am not confused about how much tax relief I will receive. Your suggestions sound like a great idea for someone in a completely different situation to mine.

I am concerned that I have not received the tax relief on my contributions to my Scottish Widows pension plan, as I have said above. What remains is for me to check with them whether I have or not. If you are right to be confident that I have, then there is no problem. That will be great news.

penners324 said:

You need a breakdown of your contributions to SW. They may well have been adding the tax onto your account. That is the standard way of doing it

You are right. This is the core point. I used to be able to see this online, but Scottish Widows shuttered that service. The breakdown only showed my purchase of credits, though, and not the GBP value of my contributions. Perhaps the credits purchase factored in my tax relief. I hope so.

Marcon said:

Unlikely that SW offered a free service - costs will have been deducted from your pot.

In short, all that's gone wrong here is you've not ticked a box when your status changed from employee to self employed - and it can be sorted out, probably via an approach to HMRC. You can claim back up to four years after the end of the tax year your claim relates to.

Yes: I realise Scottish Widows' service was not strictly free. That is why I put inverted commas around the word free.

Thank you, that's very helpful advice. If I do not receive a resolution through Scottish Widows' response, I will look into making a claim through HMRC.

Albermarle

I do not think HMRC could do anything, so you may be stuck,

I said this but it seems to be incorrect ( which is good) 

Good luck getting any responses from SW....

MallyGirl

The comment "There is no compound interest involved" was referring to the fact that pensions don't (on the whole) give interest. The investments held within them grow, or shrink, according to the market. Compound growth would be the right term rather than compound interest.

spencyrrh

MallyGirl said:

The comment "There is no compound interest involved" was referring to the fact that pensions don't (on the whole) give interest. The investments held within them grow, or shrink, according to the market. Compound growth would be the right term rather than compound interest.

I can't argue with that. Thank you for correcting me.

spencyrrh

Okay. I spent 47 minutes on hold, but I finally got through to Scottish Widows, and they confirmed they have been paying the tax relief into my account. Well, wasn't that a storm in a teacup? Thank you for letting me waste your time, everyone.