FSCS Compensation for pension tranfer

How do I treat FSCS compensation for mis-selling pension sheme transfer

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I have a client who was persuaded a number of years ago to transfer his money purchase pension pot to a SSAS and invest it in an offshore property venture which promised unbelievable returns. It became apparent a few years later that the investment was a disaster and the client engaged a solicitor to make a claim for compensation for the mis-selling of the scheme from the FSCS. The FSCS agreed the claim and has paid compensation of around £50k which represents the actual monies transferred plus £4k interest equivalent. This was paid to the solicitor which has then been paid by them direct to the client, less around 40% for their costs.

As this payment is compensation for the mis-selling by the pension company of the transfer I’m not sure how to deal with it on the clients self assessment. Is it classed as an unauthorised payment from the scheme or can it be treated as a drawdown of the pension in which case would a 25% tax free element apply and how would this be affected by the deduction of the costs. There is no guidance available from the FSCS regarding the tax treatment of the payment and I haven’t been able to find any relevant information in HMRC manuals. I’m hoping someone has had previous experience of this and can help.

If the amount is taxable the client would prefer to re-invest it into a pension scheme to avoid the tax, he is 58 years old.

Replies (7)

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By breakaway.barry
08th Jun 2024 11:28

Thanks for the link but this doesn't apply to financial loss.

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Replying to breakaway.barry:
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By kim.shaw-and-co.com
08th Jun 2024 20:32

breakaway.barry wrote:

Thanks for the link but this doesn't apply to financial loss.

If there is no financial loss, why is compensation being paid ? You have said the action was instigated in respect of the transfer from one type of pension to another leading to financial loss. Presumably by enabling participation in a poor investment which would not have been possible through the original type of pension, hence requiring the initial transfer to the SSAS ?

If the compensation received relates to poor investment advice in the form of advice to transfer then assuming s148 (FA 1996) is not in point, CG13080 is surely relevant here ? See CG13083:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg13083

TCGA92 s21 and s22 would then potentially be in point with the compensation representing a capital sum derived from an asset (membership of the original pension scheme from which a transfer was made), hence subject to CGT in the hands of the recipient.

The interest element of compensation would then be taxable as such in the normal way.

You need to understand how the cause of action brought aligns with the legislation - i.e. the nature of the compensation in that context rather than the basis on which a calculation of loss may have been agreed (i.e the subsequent investment loss arising to the SSAS).

Where compensation is received outside of the SSAS and action is brought by the member (or former member) the member's loss relates to the damage arising to the value of their pension rights from the starting point of the scheme in which those funds were originally held.

You do not state whether the recipient is a trustee of the SSAS (they often are). If funds are received other than in their capacity as trustee of the SSAS for the benefit of the SSAS then that is is indicator it may not be compensation accruing to the SSAS for poor investment advice received by its trustee(s) in relation to the investment made.

It it were, then there ought to be no associated extraction of funds from the SSAS in point and the compensation would remain part of the pension fund. In other words, it ought to have been reinvested as such on receipt - and received directly to a bank account of the SSAS rather than to a personal account of its trustee-member.

So you'll have to go back to the litigation and consider the nature of the claim brought, the capacity in which the person bringing the claim brought that claim - and the case against the respondent. It ought then to be fairly clear how the compensation received fits into the framework of the settled litigation.

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By paul.benny
08th Jun 2024 16:07

The mis-selling compensation that I received many years ago was paid into my fund. I don't recall having any choice in the matter.

Solicitor fees at 40% suggest another bit of mis-selling.

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By FactChecker
08th Jun 2024 18:25

Caveat first, IANAL.

But "a claim for compensation for the mis-selling of the scheme .. has paid around £50k which represents the actual monies transferred plus £4k interest equivalent" must presumably have been accompanied by some documentation ... from the FSCS and/or the solicitor (who has done *very* nicely out of it)?
Is this really compensation or more in the nature of a refund of the 'investment'?

Similarly there must be something that makes it clear whether the solicitor's 'fee' is truly a Fee (a sum charged for services *after* the conclusion of what happened to result in reimbursement for client) - OR just a 'share' of the reimbursement.
I would expect clarity in that area to lead to an easier decision as to how to treat the component parts.

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Replying to FactChecker:
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By breakaway.barry
09th Jun 2024 09:31

The FSCS have described the payment as “compensation for the losses incurred on the investment by the pension scheme due to the legal and regulatory failures of the pension advisors. The aim of the compensation is to restore the client to the position they would have been in had they not received the advice." The FSCS have determined that no value can be attributed to the investment as it is too uncertain and the calculation of the amount of compensation is based on the costs incurred plus an amount for the interest equivalent. An initial claim to the FSCS by the client was refused and he then engaged a solicitor on a no win no fee arrangement with a 30% + VAT and costs fee on a successful claim. The full amount of the compensation was paid to the solicitors who have then deducted their fees and paid the balance to their client, not the pension scheme. The pension scheme is administered by the firm that mis-sold the investment so the client would, understandably, be reluctant to let them have the funds. I have not been involved in any of this process but I now need to deal with the receipt in the clients Self Assessment and would appreciate advice from anyone with experience in this area.

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Replying to breakaway.barry:
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By kim.shaw-and-co.com
09th Jun 2024 12:22

breakaway.barry wrote:

The aim of the compensation is to restore the client to the position they would have been in had they not received the advice.

Which advice ? [The advice to transfer to a SSAS in order that the investment could be made ?]

What client ? [The member as a member in respect of the value of his pension fund or the member as trustee of a SSAS in respect of the value of fund available for distribution to member(s) ?]

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg13015

You're not going to get someone to 'call' on here whether there has been a deemed distribution from the SSAS on account of the member receiving compensation claimed for the trustees if that's what you're looking for. There are associated questions relevant to fiduciary matters that a lawyer would need to answer if that had happened. You'd need to engage a specialist with appropriate PI for that.

Since the client is clearly litigious and therefore high advisory risk, it may surely be time for them to engage specialists willing to take on their self assessment returns too ? You don't need to deal with self assessment for a client whose affairs you cannot work out. If you need them to get a legal opinion as to who has benefited from the claim and on what basis then that is surely what you ought to be requesting ?

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