City Trustees - part of Mattioli Woods



News and Media

05 December 2014

Pensions Perspective: Will the scheme treat compensation as a contribution?

MY CLIENT HAS BEEN NOTIFIED THAT HE WILL BE RECEIVING COMPENSATION FOR THE DELAY IN PROCESSING A TRANSFER PAYMENT. HOWEVER, MY CLIENT HAS FIXED PROTECTION. IF THIS IS PAID TO HIS SIPP, WILL THE SCHEME TREAT IT AS COMPENSATION OR A CONTRIBUTION?

Compensation has become a part of our culture and pension schemes are sometimes affected by this. However, the way in which compensation payments are treated can dictate whether the payment is either an unauthorised payment or a tax relievable contribution.

The latter scenario could have a significant impact on members with enhanced or fixed protection.

HM Revenue & Customs has confirmed that, in general, when compensation is awarded for poor advice, misselling, poor administration or poor performance of a particular investment, a compensation payment paid into the pension scheme will be viewed as a relievable pension contribution by or on behalf of the individual and, as such, will trigger the loss of protection in the following circumstances:

  • The individual receives the compensation and then uses it to make a payment into the pension scheme.
  • The individual directs that the compensation is paid directly into the pension scheme instead of receiving the payment personally.
  • The person paying the compensation is required or otherwise decides to make the payment directly into the individual's pension scheme and, in either case, the individual had no choice in the decision.

However, where the trustees are awarded compensation such a payment would not be a relievable pension contribution and protection would not be lost.

The Association of Member-Directed Pension Schemes (AMPS) has held discussions with HM Revenue & Customs and confirmed their current viewpoint. However, HM Revenue & Customs has stressed that each case will be dependent on the facts and circumstances of the particular case.

The test as to whether a compensation payment paid into a pension arrangement will be treated as a tax relievable contribution rests upon who the legal claimant is - is it the member or the trustees?

  • SIPP (independent trustee only) - the claimant is likely to be the member and therefore a compensation payment made to the pension arrangement would be deemed to be a tax relievable contribution unless it is a trustee claim for a lost investment (for example a failed bank FSCS claim).
  • SIPP (where the member is co-trustee) - the situation is likely to be the same as the previous example because the independent trustee is probably only acting on the member's instructions, but this may depend upon the trust wording.
  • SSAS - the claimant will be the trustee and therefore compensation paid into the scheme would not generally be a tax relievable contribution.

It is unlikely that an unauthorised member payment will occur where compensation is paid direct to the member, if the member is the legal claimant.

Where an administrator refunds administration fees by way of re-compensation for poor administration, this is likely to be viewed as a return of an amount that is now not due and therefore would not appear to be considered to be a tax relievable contribution.

Where a pension arrangement receives a compensation payment deemed to be a tax relievable contribution, there are no exemptions for the loss of enhanced or fixed protection, breaking the terms of flexible drawdown or exceeding the annual allowance.

Returning to the original question, is the compensation actually a reflection of the transfer value that should have been paid had the transfer been made at the correct date? If this was not in fact compensation, but a correction of the original calculation, this would not be deemed to be a contribution.

City Trustees operates a free technical helpline to support IFAs with pension challenges.
Tel: 0116 240 8731 or email: technicalhelp@citytrustees.co.uk.

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