Adviser to pay out after triggering ‘unnecessary’ tax charge

Adviser to pay out after triggering ‘unnecessary’ tax charge

An adviser has been ordered by the Financial Ombudsman Service to compensate a client after poor drawdown advice led to an unnecessary tax charge.

Advice firm Capital Professional Limited was ordered to pay out after the Fos found it had been instrumental in triggering a tax charge which the client was unable to claim back.

The client, who the Fos called Mr S, complained that an error on Capital Professional’s part led to him incurring tax on a pension withdrawal.

Mr S switched to an income drawdown plan in 2014, although this was done on an insistent client basis as Capital Professional advised against the switch.

The £27,000 which was transferred was left in cash as Mr S intended to draw it down in the short term under incoming pension freedom rules.

Mr S then converted to flexi-access drawdown where he requested a withdrawal of £10,400, under the £10,600 personal allowance at the time.

Emergency tax was applied in this instance but Mr S was able to receive a rebate.

Mr S then spoke with an adviser at Capital Professional to arrange another withdrawal of £11,000, which was the new personal allowance.

The adviser told Mr S to make this withdrawal in the most tax efficient way he would need to take £13,750 to receive £11,000, as the provider couldn’t pay the funds gross.

But the withdrawal was taxed at basic rate, 20 per cent, and Mr S was unable to reclaim all the tax because the gross withdrawal exceeded the personal allowance.

Mr S complained it was always his intention to draw income at the personal allowance but Capital Professional stated no advice had been given and the tax situation was explained prior to the withdrawal.

An adjudicator at the Fos found that by arranging his withdrawals the firm had a responsibility to treat Mr S fairly and protect his interests.

The adjudicator said the adviser had misled Mr S by suggesting he should draw £13,750 as the adviser should have known the personal allowance was £11,000 and drawing this amount would lead to Mr S paying tax he was unable to reclaim.

The adjudicator said: “The idea of drawing £13,750 came from the adviser and was fundamentally flawed.

“It was also clear that Mr S didn’t understand pension matters particularly well. It wouldn’t be fair for Mr S to share responsibility for the consequences of the error.”

Ombudsman Roy Milne agreed the adviser had known Mr S’s aim was to draw his pension tax efficiently.

Mr Milne said: “[Mr S] has paid income tax that he is not able to reclaim as a result of the adviser’s error in requesting the higher gross payment.

“I am satisfied that Mr S intended to take payments to stay within the personal allowance.

“If a lower withdrawal had been taken, he would have withdrawn the remaining funds in the following tax year. The adviser’s error caused Mr S to pay an unnecessary tax charge.”