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Industry questions tax implications of FCA’s redress scheme

Industry questions tax implications of FCA’s redress scheme

Members of the industry have raised concerns around how the Financial Conduct Authority’s redress scheme will impact taxation.

Earlier this week (August 2), the FCA published a consultation paper called Calculating redress for non-compliant pension transfer advice in which the FCA said reinstatement of redress into the original defined benefit scheme would give “absolute certainty” that the consumer has been put back into the position they would have been in. 

It said redress on bad DB transfer advice should be paid into the consumer’s personal pension to ensure it is used to make up pension shortfalls.

Felix Milton, chartered financial planner at Philip J Milton & Co, said he was pleased to see the FCA consulting on changing the rules with respect to how redress for bad DB advice is paid. 

“At the moment, we have seen cases where clients who had a transfer value in 2018, made a successful claim to the Financial Services Compensation Scheme for bad advice, the FSCS has paid the client the difference between the transfer value then and one it asked the scheme to calculate ‘now’ and compensate the difference with a direct payment to the client rather than into the pension,” he said. 

“This of course leads to a scenario where the clients benefit as usually they would have paid tax on the compensation had it been paid into a pension and then withdrawn.”

He explained that if the advice to transfer was wrong, the clients should not be compensated with a lump sum but in the form of an annuity that replicates the lost income as that would ensure they are put back in the position they should have been in prior to receiving bad advice.

“[But] there’s no concise rules from HMRC or the FSCS with respect to if compensation is taxable or not,” he added.

Likewise, president of the Personal Finance Society Sarah Lord, said the move away from redress through a lump sum alone to now allowing a transfer into a DC scheme as a replacement income is encouraging. 

“However, there are still important questions as to how the proposal would work in practice,” she said. 

“There is much to clarify to prevent adverse consequences for those harmed. For example, what safeguards will be in place to ensure that individuals in receipt of redress manage their DC fund so that the target income is actually reached? 

“We would also highlight the need to consider both immediate and long term tax consequences. We are already seeing increased numbers of consumers affected by changes to the Lifetime Allowance and balancing all of these issues may require years of appropriate oversight.”

The FCA has been approached for comment but had not responded at the time of publication.

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The FCA said the redress scheme is designed to put somebody back into the position they would have been in if they hadn't transferred out.