Providers are calling for clarity over issues surrounding compensation payments that are paid into self-invested pension schemes, to avoid members being hit with unauthorised tax charges or losing protection on their policies when receiving redress.
Generally, compensation payments received by a Sipp are treated as a contribution to the pension scheme for a member, because it is the individual making the claim and not the Sipp. This can mean it is treated as an unauthorised payment by HMRC and can give rise to a tax liability.
Claire Trott, head of technical support at Talbot and Muir, said while the stance also means the money will attract tax relief where allowance remains, members could lose any primary or enhanced protection they have in place on their pension.
Neil MacGillivray, chairman of trade body Amps and head of technical support unit at James Hay Partnership, said that the interpretation that it has been given “doesn’t follow logic”.
He said: “As an industry we find that a very peculiar outcome because all we are doing is putting the pension scheme back as it should have been.
“Amps has raised this along with the Association of British Insurers and they [HMRC] seem to be quite happy with this scenario. It is one of the things we continue to raise with the revenue and we’ve not made any progress on it.
“The whole idea with compensation is very strange - there’s no doubt that there needs to be more clarity.”
Last week, the FSCS announced it had finally resolved a tax liability issue with HM Revenue and Customs after months of wrangling over payments to Standard Life Sipp clients in respect of Catalyst claims.
HMRC eventually agreed in this case that a payment to the Sipp’s trustee, in this case Standard Life, and not directly to the Sipp member will not constitute an unauthorised payment and as a result no tax liability should arise.
However, the revenue seemed to confirm the previous stance that payments made directly to members would not be treated in the same way and told FTAdviser it would treat each claim on a case-by-case basis.
A spokesperson said: “It depends on the facts of the individual case, but it is unlikely that compensation paid into a Sipp would be an unauthorised payment... [I]t does not necessarily follow that a payment paid direct to a member would be an unauthorised payment.”
Ms Trott said she had received lots of queries from advisers about compensation payments.
“The rules surrounding that [compensation payments] basically means that if an individual applies for compensation from an adviser or from a third party and its paid into the pension we have to treat it as a contribution.
“[This] means they get tax relief if they are entitled to it, but it also means that if they have got some sort of protection enhanced or fixed protection it could invalidate that.”
Ms Trott believes that it is often the Sipp that has lost out and therefore the compensation is just “rectifying the issue”.
She explained: “If you think about it logically then this should not be a contribution as there is really no new money being added to the Sipp, it is just being put back in the position it would have been had the error or issue not occurred.”
Robert Graves, head of pensions technical services at Rowanmoor Group, said that there has been a “long running concern over interpretation of the HMRC rules over how compensation payments are treated”.
He added that perhaps the guidance given in the HMRC’s Registered Pension Schemes Manual had not been that clear.
“The issue you have to be really careful over is whether adding any money to a pension scheme - is whether it is deemed to be a contribution or not and if it is deemed to be a contribution. There’s an argument that it is [HMRC] not following a logical path for some types of compensation payment.
“More clarity would be helpful. With any black and white scenarios its going to be more generally helpful to have a clear answer but quite often there will be circumstances where HMRC will be saying it all depends on the facts and circumstances of the case.”
“It would be helpful if there was a way HMRC could articulate some more examples or through experience or cases where a provider has been found to treat something incorrectly according to HMRC.
“That then gives a warning to others to say that particular circumstance was the wrong way of treating it.”
ruth.gillbe@ft.com
