As a provider of self-invested personal pensions (SIPP) and small self-administered schemes (SSAS), we are increasingly receiving queries regarding compensation payments relating to a client’s pension fund.
These could be payments relating to poor advice (usually associated with a previous adviser), poor investment performance or mismanaged funds, and include payments from the Financial Services Compensation Scheme, Financial Ombudsman Service, investment providers and advisers.
On the surface of things, if the pension fund has lost out, it would appear logical that the pension fund should be compensated, and put back into the position it would have been had the problem not occurred in the first place.
However, things are not that simple…
HM Revenue & Custom’s (HMRC) view is that where compensation is paid in relation to a service or advice that has been provided to the underlying SIPP member (as opposed to the scheme trustees) then the compensation is treated as being payable to the client in their capacity as the member.
This means that in almost all cases where compensation is payable in relation to a SIPP compensation is treated as being paid to the individual personally.
If the SIPP member actually wants the funds to be held in the SIPP then they can, of course, put the funds back in as a contribution. This would be a personal contribution, so would have the benefit of tax relief.
Except, of course, they can’t always make the contribution. In order to make a personal contribution they need to have sufficient UK relevant earnings in the tax year, which won’t always be the case.
They need to have sufficient annual allowance, which will become an increasing problem as high earners are hit by the tapered annual allowance from April. And of course, there are those members with enhanced or fixed protection, who aren’t allowed to contribute at all.
Getting the compensation issuer to make the payment directly to the SIPP doesn’t work either, as this will still count as a personal contribution.
So actually, it is incredibly difficult to put someone, and their SIPP, back in the position they would have been in. Either they get back personally what their SIPP lost out on, but get extra tax relief when they put it back into the SIPP, or they can’t get the money back into the SIPP at all.
All of this could be avoided if HMRC would agree that it is the SIPP that is the claimant, and that it is the pension that should be put back into the position it should have been in had the problem not occurred.
The situation for SSAS is slightly different. In a SSAS, it is generally the scheme trustees that receive advice and make investment decisions.
As such the trustees of a SSAS can seek compensation, such as following problems regarding poor performance of a particular investment chosen by the trustees or because the trustees received poor advice.
Where the trustees are then awarded the compensation it can be paid directly to the scheme and such a payment would not be a relievable pension contribution and, therefore, none of the contribution conditions need to be met.
Lisa Webster is technical resources consultant at AJ Bell