Advisers have criticised the Financial Services Compensation Scheme for not helping Arch Cru claimants, who on getting lump-sum compensation have lost the tax-free pension status they had when investing in the failed fund range.
Surrey-based IFA Nick Bamford said he recently dealt with a case where someone was sent a cheque for £38,000 in compensation relating to their pension savings, which had benefitted from tax relief.
The person had invested in Arch Cru, an open-ended investment company which was suspended in 2009 and wound up amid allegations the funds had been mis-sold.
Mr Bamford, founder of Informed Choice, said: “The adviser who invested for him had gone into liquidation so his compensation came from the FSCS directly to him and I wanted to make sure there wasn’t a tax liability.
“I couldn’t get an answer from the FSCS about whether this payment would be taxable and I am still none the wiser.
“You would have thought the people responsible for making these payments would be able to say definitively.”
However, a spokesman for the FSCS said it is standard procedure to send a repayment in the form of a cheque, and said it was up to claimants to find out what the tax implications of its repayments were.
When asked if someone who received compensation as a direct payment had to pay tax on it, the FSCS spokesman did not respond.
According to FSCS rules, if an investor has a claim against the firm in default – which is the case for mis-selling claims – and FSCS finds the claim eligible for compensation, then this will be paid directly to the investor.
Alternatively, the investor can nominate for the compensation to be paid to some other party, including into their pension scheme if this is permitted by the relevant trustee or provider.
The FSCS spokesman added: “As stated in the offer letter, claimants should be aware that there may be tax consequences as a result of accepting the compensation, and they should seek independent advice at that point.”
According to a technical briefing note published by the Financial Ombudsman Service, the exact tax treatment of the compensation awarded to a consumer is likely to depend both on the circumstances of the case and on the consumer’s own financial and tax position.
Fos said it was a matter to be resolved between the Revenue and the consumer and it was not something the watchdog could advise on.
The FSCS did not respond to repeated requests to comment.
