Investors with big pension pots may face a significant tax hit if they claim compensation for pension investment misselling after HM Revenue & Customs changed its guidance on the tax treatment of pension compensation payments.
The change means that only where trustees of a pension scheme took the investment advice and chose the investments on which compensation was paid can the compensation be paid to the scheme without being treated as a relievable contribution.
If the member takes the advice, which is normal practice for member-directed schemes such as Sipps, compensation paid to a scheme would be treated as a relievable contribution and any enhanced protection will be lost for those with pension pots of £1.5m or more.
James Hay head of technical support Neil MacGillivray says: “It is quite a subtle change but it makes it far more likely that the vast majority of compensation payments into Sipps would be treated as relievable so members could lose their enhanced protection.
“Losing enhanced protection could be a nasty thing and is something that people need to be aware of because it could cost them a significant amount of money in tax charges.”
Rowanmoor Pensions head of pensions technical services Robert Graves says an increase in claim cases as a result of Keydata have put HMRC’s approach to compensation in the spotlight.
He says: “Keydata has brought this into sharp focus and we are in continuing discussions with the FSA, FSCS and HMRC. At the moment, the approach to compensation is not really working.”