Scottish Widows has been ordered to compensate a client after a rule change around overseas pension transfers led to a 25 per cent tax charge the ombudsman thinks could have been avoided.
In a Financial Ombudsman Service (Fos) decision, a client of Scottish Widows complained after the proposed transfer of his pension plan to a qualifying recognised overseas pension scheme (Qrops) became subject to the overseas transfer charge, even though he made the request before the charge came into effect.
Scottish Widows received the transfer request from its client, who the Fos called Mr B, on February 16, 2017.
The pension provider wrote to Mr B on March 2, 2017 to explain that it required additional documents to process the transfer.
However, new legislation came into effect on March 9, 2017 which meant that transfers to Qrops requested on or after this date would be taxed at a rate of 25 per cent.
This is known as the overseas pension charge and was introduced as a way to stop people from exploiting tax loopholes when transferring pension funds out of the UK.
Scottish Widows received the remaining documents from the receiving pension scheme on April 5, 2017.
The provider then contacted the receiving scheme to explain that HM Revenue & Custom’s documents had been revised to take into account the new charge and it needed a document to be filled out to complete the transfer.
Mr B’s adviser then informed Mr B of the additional charge, which led to Mr B complaining to Scottish Widows.
Scottish Widows argued that after receiving the transfer request in February, there wasn’t enough time to carry out due diligence checks and receive the correct paperwork before the transfer charge came into effect in March.
Scottish Widows said that as it hadn’t received all the correct paperwork by this deadline, it had to adhere to the legislation in place when all the requirements were met.
The Fos found HMRC guidance explained that transfers requested before the March deadline were not liable to the overseas transfer charge.
Scottish Widows did not dispute that Mr B had made his request before the deadline but it didn’t consider Mr B’s request to be one which required them to take action, as it didn’t have all the documentation to process the transfer.
Therefore, it believed the transfer was liable to the charge as the request was not binding with the provider before March 9.
HMRC guidance stated: “A transfer request is when a member has made a substantive request to the scheme administrator of their pension scheme on which the scheme administrator is required to take action in relation to the transfer.
“This means an instruction from the member to transfer £X or X per cent of their pension funds to a named overseas pension scheme. A casual enquiry is not a transfer request.”
The ombudsman decided that Mr B’s request was not a casual enquiry as it specifically asked for the pension plan to be transferred to a new scheme and was satisfied that Mr B had made his transfer request before the deadline.