Pension transfer fund undervalue refund - tax situation

jfinnie

I'm 45 years old and recently (September) transferred a historic pension - which had been sold to Re:Assure - to my SIPP.

Fast forward to now; I received a couple of cheques; one for over £2k, and another for £40 or so.  It turned out that Re:Assure mis-calculated the transfer value of the fund - the values were moving about quite a bit at the time so I'd though it was just the fluctuation around the time.  

The £2k cheque is for the fund mis-valuation, the £40 for interest that I've missed out on for not having the £2k.  

The odd thing is; the £2k cheque was actually for an amount of around £2400 of refund; they've treated 25% as "Tax-free" and the remainder 75% has been taxed at basic rate.  Now I'm not an expert, but I thought I could only take 25% tax-free sums once I hit 55 years old, and that trying to take funds out of my pension earlier than that would incurr huge tax charges from HMRC (is it 55%)?  Effectively they've paid out money from my pension to me which I'm now going to get clobbered on in my self-assessment?

Or is there some special provision for these kind of errors which means the 25% tax-free arrangement is legitimate in the case of errors made by the pension co?

If it's the latter, then I'll just pay the money back into the new pension at which point I should get tax relief.  But if the former, I really want Re:Assure to put me back in the state I was before they made this error.  

Appreciate any thoughts on this.

dunstonh

The odd thing is; the £2k cheque was actually for an amount of around £2400 of refund; they've treated 25% as "Tax-free" and the remainder 75% has been taxed at basic rate.  Now I'm not an expert, but I thought I could only take 25% tax-free sums once I hit 55 years old, and that trying to take funds out of my pension earlier than that would incurr huge tax charges from HMRC (is it 55%)?  

It is allowed for corrections and that is the correct method used.       Going back in time, people were getting corrections without tax and then getting tax relief on it if it went back into the pension.   In many cases, pension companies were using the lack of tax as a way to reduce the payout.   So, it was changed to this method.

So, all normal.

Marcon

jfinnie said:

I'm 45 years old and recently (September) transferred a historic pension - which had been sold to Re:Assure - to my SIPP.

Fast forward to now; I received a couple of cheques; one for over £2k, and another for £40 or so.  It turned out that Re:Assure mis-calculated the transfer value of the fund - the values were moving about quite a bit at the time so I'd though it was just the fluctuation around the time.  

The £2k cheque is for the fund mis-valuation, the £40 for interest that I've missed out on for not having the £2k.  

The odd thing is; the £2k cheque was actually for an amount of around £2400 of refund; they've treated 25% as "Tax-free" and the remainder 75% has been taxed at basic rate.  Now I'm not an expert, but I thought I could only take 25% tax-free sums once I hit 55 years old, and that trying to take funds out of my pension earlier than that would incurr huge tax charges from HMRC (is it 55%)?  Effectively they've paid out money from my pension to me which I'm now going to get clobbered on in my self-assessment?

Or is there some special provision for these kind of errors which means the 25% tax-free arrangement is legitimate in the case of errors made by the pension co?

If it's the latter, then I'll just pay the money back into the new pension at which point I should get tax relief.  But if the former, I really want Re:Assure to put me back in the state I was before they made this error.  

Appreciate any thoughts on this.

You won't get 'clobbered' in your self assessment, but you will need to include it. The insurer will already have done so and you're likely to find your online return pre-populated with 'earnings'(!) from an 'employer' in respect of this, which could come as something of a surprise if you're not forewarned...

jfinnie

dunstonh said:

It is allowed for corrections and that is the correct method used.       Going back in time, people were getting corrections without tax and then getting tax relief on it if it went back into the pension.   In many cases, pension companies were using the lack of tax as a way to reduce the payout.   So, it was changed to this method.

Thanks, that's really interesting.  My plan was indeed just to pay it back in and get the tax relief, I was just worried in case they'd done the wrong thing and I was now going to be in line for a clobbering, reducing the value of what they'd sent me.  It's a shame no-one seemed able to explain this on the phone to me!  Do you have a link to any Govt documents that explain this?

[Deleted User] said:

My guess is that they have not actually deducted tax from the c£2,400. 

There is something called the Gourley principle that basically says that tax should be taken into accounting in calculating the compensation you get.  So in working our your actual compensation they would have come up with a notional amount for your loss (c£2.4k) and then notionally treated 25% as tax-free and notionally treated 75% as taxable at the basic rate.  This give your £2k and this is your actual compensation.  If so, this actual compensation is not taxable and is not an unauthorised payment.  

If my guess is wrong, then you should get a payslip showing the PAYE deducted.  If so, let us know.

The interest is different and is taxable.  They should have actually withheld 20% tax on the interest payment.  So if the actual interest was £50 they should have deducted £10 of income tax and paid you £40.  You would have to include the interest on your tax return.  You might have to pay extra tax / get the £10 withheld back depending on your marginal tax rate and the other interest you have received.

 

The amount of the error was circa £2400, they applied a tax-free amount of about £600 and then taxed the remainder at basic rate. They sent me a P45(!) for £1800 of pay with £360 tax taken off with the payment.  It is also logged in my online Govt Gateway as a "past employment", ending in Jan.

Yes, the £40 was actually £50 before they withheld the tax on the interest.  To be honest the £40/50 is neither here nor there in this, the main thing is understanding the tax on the main amount is correct, and that I'm not going to get asked for the equivalent of 55% (or whatever it is that the "penalty tax" is on taking funds out of pension early).

Marcon said:

You won't get 'clobbered' in your self assessment, but you will need to include it. The insurer will already have done so and you're likely to find your online return pre-populated with 'earnings'(!) from an 'employer' in respect of this, which could come as something of a surprise if you're not forewarned...

Yes, they have provided P45, and it is online already in Govt Gateway PAYE records as a past employer.  I was still unsure that the tax treatment had been correct given I understood the 55% penalty applied before age 55.  The Govt website isn't very helpful, talks about the high rate for unauthorised payments but it seems like the details are thin on the grounds - "corrections" doesn't seem to figure in the list of exceptions when I follow the Govt website info ( https://www.gov.uk/tax-on-pension/higher-tax-on-unauthorised-payments#:~:text=You'll pay up to,re 55 (there are exceptions) ).

I'd be grateful if anyone has a link to some official information discussing how such situations are to be treated for tax.  

Marcon

This isn't an unauthorised payment - it is the correction of an error, which is entirely different.

But that cheery statement probably isn't going to set your mind at rest, so why not ask a question on https://community.hmrc.gov.uk/customerforums/ which should do the trick?

jfinnie

Marcon said:

This isn't an unauthorised payment - it is the correction of an error, which is entirely different.

But that cheery statement probably isn't going to set your mind at rest, so why not ask a question on https://community.hmrc.gov.uk/customerforums/ which should do the trick?

I wish I was so confident!
Digging a bit more on Govt website I found this:
https://www.gov.uk/guidance/pension-schemes-and-unauthorised-payments#what-is-an-unauthorised-payment

"Common examples of situations where payments are classed as unauthorised include:...

• when a scheme realises it incorrectly calculated the amount of the member’s pension pot following a transfer of funds or purchase of an annuity and the balancing payment is made directly to the member"

This seems to be exactly my situation.  The provider has mis-calculated the value of the pension pot at transfer, and paid me the balancing payment directly. 

It appears the rate is not 55%, but 40%, because it's not 25% or more of my pension pot.

"The unauthorised payments charge

Where the unauthorised payment is made to or for a member it’s the member who’s responsible for paying the tax charge – even if they did not receive the payment. ...

The rate of the unauthorised payments charge is 40%."

Thanks for the link to the forum, I will post there.

jfinnie

Thank you, appreciate the detailed reply. Indeed, the member of staff I was quizzing on the phone today seemed to fail to grasp the question at all, and just kept re-iterating why they'd made a payment to me (rather than why they'd made the payment in the way they had, and why it was OK to have done this). I did ask them to escalate it and get someone who was across the detailed tax implications to get back to me, they said they would, so this is really about collecting as much info as I can so I can have an at least partially educated conversation with them, and hopefully discuss it with the correct terms so there isn't any ambiguity as to what the question is that I'm seeking for them to clarify. On the one hand I suppose I should be glad they've been in touch to give me back my money, but I can't help but feel I've won a job I never wanted as a result...!

Marcon

jfinnie said:

Marcon said:

This isn't an unauthorised payment - it is the correction of an error, which is entirely different.

But that cheery statement probably isn't going to set your mind at rest, so why not ask a question on https://community.hmrc.gov.uk/customerforums/ which should do the trick?

I wish I was so confident!
Digging a bit more on Govt website I found this:
https://www.gov.uk/guidance/pension-schemes-and-unauthorised-payments#what-is-an-unauthorised-payment

"Common examples of situations where payments are classed as unauthorised include:...

• when a scheme realises it incorrectly calculated the amount of the member’s pension pot following a transfer of funds or purchase of an annuity and the balancing payment is made directly to the member"

This seems to be exactly my situation.  The provider has mis-calculated the value of the pension pot at transfer, and paid me the balancing payment directly. 

It appears the rate is not 55%, but 40%, because it's not 25% or more of my pension pot.

"The unauthorised payments charge

Where the unauthorised payment is made to or for a member it’s the member who’s responsible for paying the tax charge – even if they did not receive the payment. ...

The rate of the unauthorised payments charge is 40%."

Thanks for the link to the forum, I will post there.

That link dates from 2014 - a pity it hasn't been updated since then by HMRC!

jfinnie

Marcon said:
That link dates from 2014 - a pity it hasn't been updated since then by HMRC!

Indeed, I've asked the question now on the forum, and will show that information I found on Govt website (plus whatever the HMRC forum come back with) to my pension administrator.  If what they've done is indeed inline with current requirements they should be able to show me what allows this payment to be "authorised".

My gut feel says it probably isn't at the moment, until such time as I see something that supersedes this information in date.

jfinnie

Short and not that sweet from HMRC forum:
"You will be resposible for paying the unauthorised payments charge as from your details, the payment meets the conditions of an unauthorised payment."

Looks like I'm going to have to try and get Re:Assure to back out what they've done to me an pay the undervalue amount directly to my new pension provider.  Wish me luck...

jfinnie

The pension provider have got back to me with the following preliminary information, which seems to fit the circumstances:

"The legislation that allows us to make a payment of this kind is known as ‘Small lump sum

payments made after transfer out – Section 164 (1) (f) F Finance Act 2004 – Regulations 6

and 7 - The Registered Pension schemes (authorised payment) Regulations 2009 SI

2009/1171.' which is known in these regulations as ‘ relevant accretion’.

However, as a part of this, we are required to deduct PAYE tax from the payment which can

be claimed back by the customer if they are a non-tax payer."

Googling this I arrived at the following HMRC manual:
https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063700

The particularly relevant bits would seem to be:
"A scheme might also find that it holds extra rights for the member without there actually being a payment-in, for example some rights that, for whatever reason, had not been correctly identified at the time of the transfer, perhaps where there had been a valuation error in a money purchase arrangement, which had caused an investment that provided part of the transfer value to be undervalued. A later correction in the valuation could result in there being further rights in the scheme relating to the member who had transferred out.

Many of the above kinds of situation, which cause there to be further member rights under an arrangement in the scheme, will be classed under the tax rules as a ‘relevant accretion’. Where a scheme holds such further small value rights, the scheme may pay a one-off small lump sum to the member (or in respect of the member, if the member has since died). Such a ‘small lump sum’ will be an authorised member payment providing the following conditions are met (subject to the proviso at the end). The conditions are:

• there has been a recognised transfer out of a registered pension scheme (the originating scheme) in respect of a member (the transferred member), and
• the recognised transfer was to another registered pension scheme or to a qualifying recognised overseas pension scheme, and
• after that transfer, there was a ‘relevant accretion’ in the scheme for the member (whether still living or dead), meaning:
• a payment is made into the originating scheme in respect of the member for whom the transfer-out was made (this will typically apply to money purchase benefit rights), and / or
• there is a further allocation of value to the ‘member’s arrangement’ above the value which the administrator had expected the sums and assets held for the purposes of that arrangement to be worth when the transfer-out was made - as might occur for example, with a corrective revaluation of sums and assets (again, this will typically apply to money purchase benefit rights), "

Further down the page they describe the tax treatment, which appears to be what the pension provider have done.

This would seem to cover the situation pretty well, yet would appear to be in contradiction to the much more basic information I found describing payments as unauthorised in such situations.  Nice and clear, eh!