This letter is not sour grapes but about justice and fair play for the small IFA in a world that has now gone mad.
We have recently been on the wrong side of a judgment by the PIA Ombudsman, a judgment which shows that the ombudsman has a complete lack of understanding as to the preferential tax status of a pension arrangement for one thing besides others.
Our understanding of the ombudsman's role is that he is required to adjudicate logically and fairly dicate if an individual – our client – has suffered a loss and then, if so, award adequate compensation to the victim.
The case centres on a client who used to work overseas and approached us with a specific request for a pension arrangement.
He duly took out a personal pension plan which was changed to an executive pension plan funded by his own limited company for reasons of maximum funding and incorporation.
Just under three years later, the client took up an overseas employment position.He was not able to continue contributions to his pension plan and duly filed a claim against us for his financial loss in no longer being able to contribute.
In his judgment to the client, the ombudsman stated: “It might reasonably be expected that you would continue to work overseas.” The ombudsman expected us as IFAs “to have fully established the extent of your overseas working and earnings”, in essence, requiring us to predict the future.
If you are reading this letter, think about this one.
Whether or not the judgment is correct, it is the settlement that has caused us and other IFAs and insurance lawyers that we have spoken to astonishment and, in some cases, abhorrence.
The ombudsman has judged that the client has suffered a financial loss. A pension policy cannot be surrendered or cancelled and, in awarding a settlement, the ombudsman has stated to the client: “You will continue to retain the policies and the funds accrued within them.”. The client is 49 years old and could, in certain circumstances, access the pension funds within five months.
The ombudsman has awarded a sum equal to the gross contributions paid in over the three years with absolutely no allowance for the significant and various tax reliefs that have been given. Here, the ombudsman has shown a complete lack of understanding that the client's so-called “loss” is his net contributions, that is, the sum that he has ctually expended.
The ombudsman has then awarded interest on the gross contributions for the period of just under three years but has deducted one-quarter of the current transfer value.
Why? Why a quarter, why the transfer value?
The transfer value is only relevant if the client transfers the fund and this will be a decision that he elects to take and will not be one based upon advice from us. The current fund value is significantly higher and is the true value of the policy's worth to the client and upon which his retirement benefits will be based.
The ombudsman goes on to say in his settlement decision that the client “will retain your right to the pension policies, which will provide you with appropriate benefits at retirement”.
You bet he will. The projection is that the tax-free cash lump at 60 will return the client's gross contributions in full for a second time and still leave him with a fund that will buy an annuity.
As an aside, the ombuds-man has chosen to ignore totally and exclude from the compensation figure the cost of death-in-service cover which the client requested and was costed within the premium.
One further point. Should the compensation in respect of the EPP premiums be paid direct to the client or back to his limited company which actually paid them?
What no one that we have spoken to can understand is where the client has suffered a financial loss. The client argues that he cannot continue to contribute to the pension policy.
How can this be a financial loss when the contrib-utions never leave his pocket? The money that he has invested has not disappeared. It is in some very sound-performing pension funds with Sun Life and the client can in fact continue contributions if he were to return to the UK.
As we all know, it is a simple exercise to reorganise a pension arrangement and even if the client is not working he can fund £300 a month into a stakeholder pension.
We are in consultation with our lawyers and PI insurers to determine whether we should pursue a judicial review to seek to overturn this gross injustice.
The Finanacial Management Group,