Pensions disputes: Ombudsman relies on telephone recordings to make determination

Out-Law Analysis | 23 Nov 2022 | 3:46 pm | 4 min. read

Recent determinations by the UK’s Pensions Ombudsman offer insight into how the watchdog assesses and relies on evidence, as well as how it expects pension providers to act when there is uncertainty surrounding figures they are provided with.

Ombudsman assesses recordings of phone calls

In one case, all Mr A’s funds in the plan were held in cash. Following two telephone conversations with the provider, Mr A decided to take all his funds as a lump sum payment of just under £75,000. Upon receiving the funds, Mr A complained to the provider that he was liable for higher rate income tax and calculated he was £8,896 worse off as a result. He complained that the retirement income quotation he received did not include a tax breakdown, and this led him to a decision that was not in his best financial interests.

During the telephone calls between Mr A and the provider, the provider strongly recommended that Mr A seek financial advice to inform his decision. The provider explained in correspondence that the payment could not be returned once it had been made, and tax would be deducted in line with HMRC requirements. The provider advised Mr A that he would be placed on the emergency tax code and explained how this applies. Mr A complained that he only realised he had been pushed into the higher rate tax band when he received the tax breakdown from the provider, which was after the payment had been made.

The provider was responsible for providing appropriate risk warnings to Mr A, in line with Financial Conduct Authority (FCA) guidance. The FCA Handbook states that appropriate risk warnings, highlighted clearly and prominently, must be given to clients looking to withdraw pension as a lump sum. The Handbook does not set out a prescribed method or wording for communicating these risk warnings.

The ombudsman dismissed Mr A’s complaint, concluding that the provider was not in a position to advise Mr A that his payment may have been more tax-efficient if taken over multiple years. During Mr A’s calls with the provider, there was a discussion of the application of the emergency tax code and the ombudsman considered sufficient warning was given to Mr A of the potential tax implications of his payment.

This case highlights the responsibilities of consumers and providers in respect of the tax implications of pension withdrawal. In making his decision, the ombudsman noted that it was Mr A’s responsibility to manage his tax affairs, and that the provider had recommended he take advice before proceeding with the payment. The provider’s responsibility was to give appropriate risk warnings in line with FCA guidance.

In making his determination the ombudsman relied on recordings of the telephone calls between Mr A and the provider. This evidence allowed him to identify the extent of the explanation given by the provider. The recordings also showed that Mr A was keen to proceed with the payment, which the provider made within Mr A’s desired timescale.

Uncertainty over lifetime allowance figures

In another case, Mr R complained that he was given incorrect information by the provider in relation to his lifetime allowance (LTA). He said this led him to make further pension contributions that he would not otherwise have made. He complained that his benefits had accrued in a tax inefficient manner – he is facing a tax charge because his total benefits will, once crystallised, exceed the LTA.

Mr R was in receipt of a scheme pension from the provider’s staff scheme. In 2016, his financial adviser asked the provider for confirmation of the percentage of Mr R’s LTA that had been used when he took his benefits. The provider advised that Mr R had used 28.07% of his LTA in respect of benefits from the scheme, which was calculated at Mr R’s retirement date on 1 February 2006, and that Mr R’s LTA currently stood at 70.84%.

The provider had not been made aware of any further benefit crystallisation event. Mr R’s adviser asked why any of the LTA had been used, as benefits taken before 6 April 2006 were not subject to the LTA test. Mr R also queried why the two figures quoted did not add up to 100%. The provider explained that if Mr R was going to take another pension, that scheme would ask for Mr R’s LTA which was 70.84%.

In 2018, in response to further queries, the provider explained that it could not provide a definitive LTA figure until there had been a further benefit crystallisation event (BCE). The 28.07% figure previously provided was given as a guide to the amount used.

In 2019, Mr R lodged a complaint with the provider. He argued that the provider had given inaccurate and ambiguous information which prevented him planning his pension contributions to avoid a tax penalty. Mr R did not think the provider’s 2016 correspondence made it clear that the 70.84% figure referred to LTA used rather than LTA remaining. Mr R now expected to exceed his LTA by 15.97% and had estimated that he was around £5,000 worse off.

The provider accepted that incorrect information had initially been given in May 2016, but this was corrected a month later, although the correspondence should have been clearer. The provider considered that Mr R and his adviser had sufficient information to understand Mr R’s LTA position and make an informed decision about his pension contributions. The provider offered £750 to recognise provision of incorrect information and the lack of detail provided.

The ombudsman dismissed the complaint with no further action being required by the provider. The ombudsman decided that in the circumstances it was not reasonable for Mr R and his adviser to have relied on the incorrect information from the provider. Although it was aware that the correspondence lacked explanation, Mr R’s adviser chose to interpret the figure of 70.84% as LTA remaining without seeking further clarification from the provider.

The ombudsman concluded that it was not reasonable for Mr R and his adviser to rely on the 28.07% figure. In addition, while the provider should have advised its initial figures were estimates, the lack of distinction about whether or not the figures were estimates was not a material factor in Mr R’s decision about his pension contributions. The ombudsman decided that the £750 already paid to Mr R adequately recognises the distress and inconvenience he experienced.

This decision shows that the ombudsman will expect members and their advisers to question figures and calculations given to them where there is uncertainty. The PO’s adjudicator noted that the formula for calculating LTA used is publicly available and the adviser would have had sufficient information to estimate the figure itself. If correspondence is unclear, or if there is uncertainty about how figures have been derived from the known background facts, this casts doubt on the calculations and may mean it is not reasonable for members to rely on them.

Co-written by Bogdan Oprea of Pinsent Masons.

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