Prudential has been ordered to pay 50 per cent of the tax liability incurred from a policyholder who it wrongly cashed in the pension of.
In the Financial Ombudsman Service case Mr S, who is represented by his IFA Mr H, complains Prudential is responsible for an error that occurred when money was withdrawn from his pension fund.
In September 2017 Mr S called Prudential to find out about making a withdrawal from his pension plan.He was turning 55 and his intention was to use any tax-free lump sum for a property purchase while the remaining funds would then be used to pay the monthly mortgage payments.
During the call, Prudential suggested that Mr S contact his financial adviser and ask them to put any request in motion for him.
Mr S did this, and on 29 September 2017 Mr H requested what he says he understood to be the withdrawal of £72,500 only.
Mr S would have been entitled to withdraw up to 25 per cent of his pension fund tax free, and the £72,500 would have represented a portion of this tax-free amount.
The request was made via Prudential’s online system and on 10 October 2017 a representative from Prudential contacted Mr H’s office to query the request it received online.
The representative noted Mr S had indicated on the phone he wanted access to the tax-free amount, yet the instruction received online was for payment of a much larger uncrystallised fund pension lump sum.
Although this lump sum would have the 25 per cent tax-free component of £72,500 the rest would incur a tax liability.
Mr H was not in the office so Prudential’s representative spoke to Mr B, his colleague who indicated it was fine for Prudential to proceed with the payment.
Following the call, on the same day, a gross payment of £290,000 was made to Mr S who incurred an £86,570 tax liability on the amount and was left with a net payment of £203,430.
Additionally, the payment of the lump sum pushed him into the 45 per cent tax income bracket for the remainder of the year.
Mr S was extremely upset about what had happened and believed a request had been made for the withdrawal of part of his 25 per cent tax-free cash only. He had not wanted to incur a tax liability or withdraw such a large amount of money.
Mr H contacted Prudential to establish what information Mr S had asked for and what he had inputted into the online system. He pointed out an illustration screen which would have set out what he had asked for prior to final submission had not been working. Additionally, he had concerns about why Prudential had taken information from his colleague Mr B when Mr S was not his client.
Ultimately Mr H thought the error had been a result of flaws in Prudential’s systems and requested it ask HMRC to reinstate the funds as UK tax provisions.
This would allow for the reinstatement of funds if “genuine errors” occurred which were caused by the pension scheme administrator.
Prudential looked into what had happened and concluded it had not made a mistake and stated the request received online from Mr H was for a lump sum payment of £72,500 tax-free cash with the corresponding amount of taxable income also being paid.
It explained lump sum payments have a set structure that provide 25 per cent tax-free cash and 75 per cent taxable income, which it thought Mr H should have known about.
In relation to the telephone conversation with Mr B, Prudential identified relevant data protection checks had not been undertaken to verify who was being spoken to and offered £300 in compensation.
The matter came to FOS and was considered by an investigator who did not think Prudential was at fault for processing the transaction. He also said Prudential’s £300 offer for the data protection issue was fair.
But Mr H disagreed and argued the absence of the illustration led to the current situation.
He also reiterated Prudential should not have sought confirmation from Mr B and added generally there was a lack of “checks and balances” within Prudential’s systems.
In May 2018 ombudsman Tope Adeyemi issued a provisional decision which said Prudential could have done more to contact Mr S directly in Mr H’s absence.
Adeyemi added it is fair Prudential pay 50 per cent towards the amount Mr S had to pay in extra tax but it was not the only party responsible for the error.
Therefore it is a matter for Mr S to decide if he wants to pursue any other parties he might think are responsible for the extra tax.
No further information in relation to the complaint was provided by Mr S or Prudential so the ombudsman says compensation should be paid in the manner outlined in the provisional decision.