If you’ve recently received pension compensation, or you’re planning on submitting a claim for mis-sold pension compensation, you might be wondering about the tax treatment of any payments you might receive.
There are a couple of factors that come into play when it comes to pension compensation and tax. HMRC will look at the type of compensation you’ve been awarded to decide whether or not it is taxable. They’ll also take into account your financial position.
We understand that it might seem unfair that your compensation could be subject to tax. After all, the compensation is awarded due to the mistreatment of your pension funds. However, in the majority of cases, pension compensation is not taxable.
In this guide, we discuss the ins and outs of tax on mis-sold pension compensation to help you gain a clearer understanding of your financial situation.
When is compensation for a mis-sold pension taxable?
Tax treatment of pension compensation is a complicated area. There are a number of scenarios that could determine whether or not your compensation is taxable, but it’s worth noting that HMRC will take into account your individual circumstances first and foremost.
If applicable, the Finance Act 1996, section 148 (FA96/S148) exempts mis-sold pension compensation from tax and interest for those who were in occupational pension schemes – this includes Income Tax and Capital Gains Tax.
To be exempt under FA96/S148, you must meet the following criteria:
- You opted out, transferred out of, or failed to join an occupational pension scheme in favour of joining a personal pension plan or taking out a retirement annuity contract.
- You received ‘bad investment advice’ which the government defines as being:
- a result of negligence
- a breach of contract
- a breach of fiduciary obligation
- Your bad investment advice was received, at least in part, between the period of 29 April 1988 and 30 June 1994. This is the period covered by the review ordered by the Securities and Investment Board in 1994.
This means that, in the majority of cases, your pension compensation is likely to not be taxed. However, we would always recommend speaking with HMRC to ensure that your compensation receives the correct tax treatment. HMRC and the Financial Ombudsman will always aim to put you in the financial position you would have been in prior to your mis-sold investment.
Making your claim
If you’re yet to claim for pension compensation due to mis-selling, our SIPPs claims team is here to help. Our claims experts can help to safeguard your financial future, claiming for any negligent advice you might have received when it comes to SIPPs.
Take a look at our testimonials to see how we’ve helped other pension savers like you.
Further pension guides: