The Society of Pension Professionals (SPP) has highlighted some issues with the Financial Conduct Authority’s proposal to change the way it calculates redress for consumers affected by unsuitable pension transfer advice.
In its response to the consultation, the trade body presented five main problems with the proposals, including scheme members facing higher tax bills as a result of being paid compensation.
Under the draft changes, affected customers could be reinstated into the original pension scheme, which the SPP admitted would be the “ideal solution”, but it is unlikely to be an option for most of those affected.
Similarly, the FCA wants to treat compensation as an “augmentation” in the receiving defined contribution (DC) scheme, but the trade body said this is not going to be as straightforward as it seems and could create issues when it comes to the tax treatment of the augmentation.
The payment of the lump sum has also received some criticism. The FCA believes this would put consumers back in the position they would have been in had they not transferred out. But the SPP said that the sum deemed to be “sufficient” to achieve this will vary depending on the date of calculations, especially considering the high inflationary environment we are experiencing.
It added that consumers are expected to invest such a lump sum “prudently”, although “there is no guidance as to [what] ‘prudent’ investments might be, and they may well vary depending on the age of the member”.
On top of that, the SPP urged the FCA to consider the fact that the vast majority of members will be less sophisticated investors who may not have access to the resources to seek independent financial advice, leaving them in a vulnerable financial situation.
Lastly, the trade body emphasised that receiving redress could put consumers in a situation where they would owe more tax. This is because the lump sum could increase their net relevant earnings and/or surpass their annual allowances.
As a result, it has urged the regulator to engage with HM Treasury and HM Revenue and Customs to make sure consumers get the right outcome and treat the lump sum payments as exempt from pensions legislation.
The consultation is now closed and the FCA is expected to issue a policy statement on the matter in 2023.
