Aviva to pay client's tax bill after pension error

The 52 year-old client asked their adviser to check if they could access their pension pot early, on the grounds of ill health, a process known as ill health early retirement.

The adviser completed the paperwork and sent it to Aviva, with the latter initially approving the application and allowing the client to make two withdrawals from their pot. 

But when the client went to make a third withdrawal, they were refused.

In an email seen by FT Adviser, the client was told that the “professionals” advising them “should have known” they are not eligible for an early retirement pension on the basis of the available information. 

The adviser took objection to this, stating his role is to ensure the form is completed as accurately as possible and to then forward the application to Aviva. 

In his email with Aviva, the adviser said: “I want to reiterate that both myself and [the client] strictly followed the procedure determined by Aviva to establish if ill health early retirement was permissible. The form was completed, as attached, and Aviva granted the early access to her pension fund.

We have apologised to [the adviser]. We have also apologised to our customer, and provided compensationAviva spokesperson

He continued: "It is disturbing that the inference in your recent email to [the client] is that I, as the professional adviser, should have known if ill health early retirement was permissible. However I simply refute this and acted in good faith as the client’s intermediary to establish if ill health early retirement qualified.

"The decision to grant this was the sole responsibility of Aviva. You need to establish and investigate whoever was ultimately responsible for sanctioning the ill health early retirement before trying to shift the blame. Beyond making the application in good faith, neither myself or client had any means to influence the decision.”

Aviva later told FT Adviser the error was its own. 

An Aviva representative said: “We acknowledge that this is a result of errors we made at the time of [the adviser’s] client’s initial application.

"We understand [the adviser's] concern that he felt there was an intention to shift responsibility for this error to him. This was not our intention and we have apologised to [the adviser]. We have also apologised to our customer, and provided compensation.”

Complicated rules

The application included a doctor’s note stating the client was unable to work. But Aviva stated it should not have allowed the first two payments to happen, based on the information they had at the time.

This is because, at the time the client sought to retire, they had for a number of years been a full time wife and mother, and so had no income. They subsequently divorced. 

The Aviva representative said: “This is because taking a pension early for health reasons, or ‘ill-health retirement’, is designed to replace the income from employment, due to being permanently incapable of carrying on that occupation through ill-health.

"As [the] client was not employed and receiving an income at the date stated on the ill-health form, they were not eligible for ill-health retirement. This is an HMRC stipulation, and not an Aviva judgement.”

The adviser said the situation has caused their client “anxiety and distress".

Aviva told the adviser the application was incomplete, and in an email to the client stated they may be liable for “substantial penalties".

A client that makes withdrawals from a pension prior to the age of 55 can face a tax liability. 

Because Aviva approved the first two withdrawals, the company will now cover any tax liability incurred.

With regard to future withdrawals, Aviva has asked the client for further medical evidence, specifically relating to the year in which the client first stopped being in paid employment. 

In its statement, Aviva said this is because the client had ceased their paid work six years prior to making the pension claim, having been declared medically unable to work in that profession at that time, so they want a further medical assessment to make clear the client cannot return to that line of work.

Rachel Vahey, head of public policy at AJ Bell, said the rules around this issue are complicated because HMRC may take the view that a person cannot perform their usual occupation, but can perform another occupation.

She added that while the HMRC rules “help”, the rules of a particular pension scheme are likely to be its own rules.

david.thorpe@ft.com