Philippa Hann, a partner in the financial services litigation team at law firm Clarke Willmott, is currently dealing with three separate clients regarding mistakes by financial advisers in “failing to adequately investigate their [clients’] pensions resulting in bad advice”.
Ms Hann said: “The clients have either had advice to make a contribution to their pension meaning that they have lost enhanced protection or the adviser has failed to advise their client to take up transitional protection.
“In all cases the client is now facing a far larger tax bill than they should. Two of the complaints are now with the Fos. I think it will be an issue affecting all IFAs.”
At the start of the new tax year, the standard lifetime allowance for pension savers will be reduced for the second time since 2011, from £1.5m to £1.25m.
In addition to existing primary, enhanced and fixed protection, the government introduced two new forms of protection to crystallise the pre April 2014 £1.5m level: fixed protection 2014 and individual protection 2014.
Most of the protections, with the exception of individual protection, are lost if the saver makes any further contributions to their scheme, potentially subjecting them to a retrospective tax bill.
FTAdviser has seen one of the Financial Ombudsman Service decisions where the adjudicator upheld a complaint about the loss of enhanced protection as a result of an advised pension contribution being made.
The unnamed advice firm admitted that it handled the payment that invalidated the enhanced protection and made an offer to the client of almost £18,000 to cover the tax liability.
The advice firm added that “none of the completed paperwork indicated” the client had enhanced protection. The loss of enhanced protection only came to light when the client got a new adviser in March 2013.
However Ms Hann has argued, on behalf of the client, that the calculation undertaken by the advice firm is wrong.
According to documentation, the client’s pension stands at £315,450 over the previous £1.5m lifetime allowance, and that the client will have to pay 25 per cent tax on the amount that is over that as well as a £3,000 fine from HM Revenue and Customs.
As a consequence, Ms Hann argues the advice firm should pay over £80,000. The decision will be going to the ombudsman as the advice firm disputes the figures and other aspects of the ruling.
There are currently six decisions on the Fos’s online decision database involving some kind of lifetime allowance protection. Only cases where an original adjudicator decision has been challenged and referred for consideration by an ombudsman are listed.
Ms Hann adds: “Advisers failing to look at enhanced and fixed protection is a wider issue and I am fully expecting more and more of this.
“The other thing they need to be very aware of is the fact that if you have a client, who has a £500,000 pension pot and they have 10 to 15 years until retirement, the lifetime allowance is [£1.25m] and if you look at the bull market, which is happening now, it won’t take much for those pension pots to reach the lifetime allowance.
“Stuffing money into a pension where inevitably they won’t be able to take advantage of the tax system and if they are ignoring other avenues for pension savings, I think there will be a lot of questions in due course as to why advisers haven’t considered retirement savings outside of a client’s pension.
“Some will be looking at the advice they receive and questioning why their adviser didn’t do something else instead.”
