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My PFS - Technical news - 12/05/2015

Publication date:

11 May 2015

Last updated:

06 July 2018


Technical Connection

A news update from the Personal Finance Society covering the period 22 April 2015 to 5 May 2015: taxation and trusts, investments and pensions.

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Taxation and trusts


Upper Tax Tribunal confirms partial encashment 'mistake' can be rectified

The Upper Tax Tribunal has ruled that a taxpayer can rectify a form under which he chose to make a partial encashment across a series of life assurance policies that resulted in a much higher tax liability than would have been incurred had he fully encashed a number of segments.

The case of Joost Lobler v HMRC [2013] concerned a series of life assurance policies, effected with Zurich Life in 2006, from which Mr Lobler, the policyholder, withdrew large amounts during the first two policy years by way of partial surrender resulting in a significant artificial gain and a substantial tax liability even though he had not made any real gain on the policies.

The First-tier Tribunal (FTT) was sympathetic to the policyholder's position (he was effectively bankrupted by the tax liability) but couldn't find a way to solve the problem because, as matter of strict law, he had been correctly taxed on the transactions he undertook.

However, the Upper Tribunal (Lobler v HMRC, 2015 UKUT 0152 TCC) has overturned the FTT decision on appeal, ruling that Mr Lobler was entitled to be taxed on the basis that he made a tax-free full surrender of the policies instead of a partial surrender.

To reach this solution, the appeal judge used the general legal concept of rectification which allows a mistake about the consequences of a transaction - which can include tax consequences - to be corrected if the mistake is sufficiently serious. In Mr Lobler's case that test was met as the judge said it was common sense that nobody would willingly contract to pay an amount of tax that would effectively lead to his own bankruptcy if there were a choice not to do so and achieve the same goal.

Mr Lobler's appeal was therefore allowed, but only on the grounds of rectification. All his arguments based on public law and human rights grounds were dismissed.

The decision has some interesting ramifications, not least because several cases involving taxpayers in similar circumstances had been stayed pending the outcome of this appeal. Pursuant to the case, the Chartered Institute of Taxation now intend to make formal submissions to HMRC and the Treasury to secure a change in the law.


HMRC cannot reject income tax rebate claims as 'out of time'

The Upper Tax Tribunal has ruled that HMRC, contrary to its long-standing position, cannot refuse a taxpayer's claim for a refund of overpaid tax, even if the claim is made more than four years after the end of the tax year concerned.

In a significant reversal of HMRC policy, the Upper Tax Tribunal has ruled that HMRC has no general right to refuse a taxpayer's claim for a refund of overpaid tax going back more than four years. The case (Higgs v Revenue & Customs[2015]) concerned self-employed solicitor Andrew Higgs who had failed to submit his self-assessment return for the 2006/07 tax year until November 2011, by which time he had realised that he had overpaid £27,000 in tax for the tax year in question as a result of large payments on account that were made on the basis of the previous year's income.

HMRC's policy has always been that s34(1) of the Taxes Management Act 1970 (TMA) sets a time limit on rebate claims, with the effect that no assessment to tax may be made later than four years after the end of the tax year concerned and, accordingly, HMRC refused to process the form or give him a tax rebate.

However, HMRC's position (which it has held for some years) was rejected by the Upper Tax Tribunal on judicial review. Careful analysis of the legislation found that the s34 time limit was intended to apply only to assessments made by HMRC, while taxpayers have the right to file a self-assessment return many years after the end of the tax year concerned, and are automatically entitled to a rebate of any overpaid tax.

Following the decision, HMRC will now be forced to change its longstanding stance on 'out of time' tax rebate claims. However, it is important to note that the decision will be limited to instances where the taxpayer has failed to submit a tax return for the year in question. Different rules apply to returns submitted on time that are later found to contain inaccuracies.

Investment planning


GDP figures stumble

The Office for National Statistics' preliminary estimate of UK economic performance in the first quarter of 2015 shows the economy has slowed sharply from its 2.8% growth last year.

Shortly before the general election, what the Government did not want is a set of economic data suggesting that the picture was not quite as rosy as it had been painted in all that election bumph. However, that is what has arrived.

The preliminary (important word, that) GDP figures for the first quarter of 2015 from the Office for National Statistics (ONS) show the economy grew by 0.3% in the first three months of the year, half the rate of the previous quarter. The pundits had been expecting a cooling down to 0.5% because some of the data coming in had been weak (eg construction), but 0.3% was a surprise.

Across the main sectors of the economy, the performance is shown below:


Q1 2015




- 0.2%







The total figure is positive by dint of the fact that the services sector accounts for 78.4% of the economy. Construction, which only counts for 6.4% of UK plc, took 0.1% off the first quarter GDP reading. The sector does tend to produce volatile numbers - the first quarter of 2014 saw growth of 3.7% in construction whereas the final quarter was -2.2%.

Drill beyond where the politicians will look and you see that the UK economy as a whole is 4% above its previous peak of seven years ago (2008 Q1, before the financial crisis hit hard). However, that is all down to the strong services sector (up 8.5%); the other sectors are languishing between 4.8% and 10.4% below their 2008 Q1 levels.

In last month's Budget the OBR projection for 2015 GDP growth was 2.5%, which at first glance now looks a tad optimistic. However, that 0.3% is only a preliminary estimate and, according to the FT, on average the initial figure has been revised upward by just under 0.1%.

Add this to zero inflation numbers and the long-predicted first rise in UK interest rates has probably moved a little further away…


More market numbers

The last two weeks saw two market events which are worth noting, but not getting too excited about.

Think back 15 years to the early days of the new Millennium. Tony Blair was in his first term as Prime Minister and, across the Atlantic, Bill Clinton was coming to the end of his second term as President. The UK base rate was 6.0% and the Fed Funds rate was 5.0%. It seems a distant world, doesn't it? Yet last week two events occurred which harked back to that era:

  • On Wednesday the Nikkei 225 Index closed above 20,000 for the first time since April 2000.
  • On Thursday the Nasdaq (or, more accurately, the Nasdaq Composite) finally surpassed its March 2000 peak, which marked the popping of the millennial technology bubble.

As happened when the FTSE 100 finally broke new ground after its end 1999 peak both items grabbed some headlines and raised questions about the performance - past and future - of equity investment. There are a few points that should have received a little more attention in the press:

  • The Nikkei 225 may be a widely quoted index, but it is not an index which meets modern standards. It is weighted by share price (like the Dow Jones Index) rather than market capitalisation (the chosen method for virtually every professionally used index).
  • 20,000 on the Nikkei is still little more than half its peak which was 38,916 hit on 10 December 1989. By March 2009 the Nikkei was teetering around 7,000 - an 80%+ decline over 20 years.
  • The Japanese market is much better value than when it was last at 20,000. According to Bloomberg, the market's price/earnings (P/E) ratio is now 23 against over 100 back in 2000.
  • The tech industry companies which dominate the Nasdaq are also very much better value than back in 2000. Today's P/E is 26, whereas in 2000 the figure was 76, with some companies being valued at over 400 times earnings.
  • The Nasdaq may be at the same level as 2000, but the market's capitalisation has grown by about a quarter over the period as new companies have entered the market.
  • The index's constituents have changed substantially since 2000. For example, back in 2000 Google was not even listed and Microsoft was the largest constituent. Apple is now the leader, accounting for about 10% of the index.

15 years is a long time in investment. For example, US inflation would have added about 40% to the index.



No NINO - No pension tax relief

A number of payroll professionals and software providers have challenged pension providers, specifically NEST, who advised that unless a National Insurance number (NINO) was present for the pension member, they couldn't have tax relief at source.

Due to the fact payroll cannot withhold pay or in fact do anything even when a NINO isn't present the Chartered Institute of Payroll Professionals (CIPP) felt this was rather unfair, given the automatic enrolment obligations, where employer's cannot delay their duties because of a lack of NINO.

CIPP challenged NEST and HMRC to provide the legislation to which the rules dictate employers must provide a NINO for the member to benefit from tax relief.

HMRC published their latest Pension Schemes Newsletter (no.68) highlighting the legislative information below which unfortunately means that if there is no NINO, then there is no entitlement to tax relief at source.

TPR April 2014 AE update: Companies with no staff

(AF3, RO4, CF4, JO5, FA2)

The Pensions Regulator (TPR) has published an auto enrolment update aimed at companies who employ no jobholders and therefore, may not have any automatic enrolment duties. For example a services company with no staff and a director who has no contract of employment.

There is information on TPR's website on what sole directors can do if they believe automatic enrolment duties do not apply to them, as well as further information to help husband and wife companies and family businesses understand how automatic enrolment duties apply to them.

If you have clients who do not have staff and who receive a letter from TPR, you can advise them to write to TPR to explain their particular circumstances.


UK pension advisers need protection from liability to 'insistent clients'

The Association of Professional Financial Advisers (APFA) has become the latest group to call for more clarity from the Financial Conduct Authority (FCA), as part of its response to the regulator's consultation on proposed changes to the pension transfer rules. The Personal Finance Society (PFS) raised similar concerns about the issue of "insistent" clients determined to transfer safeguarded defined benefit (DB) savings into more flexible defined contribution (DC) schemes at the end of last month.

APFA director general Chris Hannant said that the FCA's proposal to bring transfers out of safeguarded DB schemes into DC schemes within its regulatory remit needed further work before it could be formalised - something that the FCA is keen to do by June.

"The FCA should make it clear that no liability would attach to advice which, although the recommendation might be against a DB to occupational DC transfer, acts as 'enabling' advice regardless," he said. "The FCA must also give the advice industry greater certainty on where and how liability would attach for advice to 'insistent clients' who want to go ahead with a transfer against advice."

"While we are confident that the advice industry will continue to rise to the challenges set in motion by the government's pension reforms, investment in the retirement advice space is unlikely to happen without greater FCA clarity on the liability implications of the new pension transfer rules; this could potentially restrict consumer access to professional advice at a time when they need it more than ever," he said.

'Enabling' advice refers to an adviser processing a transaction despite advising against that course of action.

The FCA recently consulted on its intention to bring advice on transfers of 'safeguarded' benefits out of DB schemes into DC schemes into its regulatory remit. This is something that the regulator feels is necessary in order to ensure that savers seeking to take advantage of the new flexibilities available to DC pension scheme members, but not DB scheme members, are properly protected. Safeguarded pension benefits are benefits other than money purchase or cash balance benefits, and are usually backed by employer guarantees.

Under the proposed new rules, advising on the conversion or transfer of safeguarded pension benefits into flexible benefits would become a regulated activity in the same way as transfers from DB schemes, such as self-invested personal pensions (SIPPs) already are. Those advising on such transfers would be required to hold the same pension transfer specialist qualification that must be held by those advising on DB to personal pension transfers.

Hannant said that the FCA also had to clarify "under which precise circumstances" financial advisers would be required to obtain a pension transfer specialist qualification before considering DB benefits. "Our engagement with the FCA on this consultation leads us to conclude that under the new pensions regime, nearly all advisers who want to continue offering retirement planning services will need a pension transfer specialist qualification," he said.

At the end of March, the PFS warned its members not to process transfers for 'insistent' clients acting against professional advice unless and until the FCA had confirmed that neither they, nor the Financial Services Compensation Scheme (FSCS), would be liable for claims if those clients later lost out because they cashed in their safeguarded benefits. It has written to the government and the FCA urging them to formally address the issue.

"If the government want advisers to help implement greater consumer choice, we are calling for an urgent change of policy in recognition of the risks this represents to both the public and the future reputation of the advice profession," said PFS chief executive Keith Richards.

"Caveat emptor must become a recognised component of the insistent client process. Until that happens, advisers should not get involved in unsuitable facilitation without being protected. It benefits neither them, the profession nor the public we are here to serve," he said.


Liberation schemes: Ombudsman rules on transfers

Following on from the recent industry-wide Code of Good Practice on pension scams, the Pensions Ombudsman has issued his latest determinations on liberation. These reinforce the obligation on pension schemes to comply with a member's right to a transfer (whether under legislation or scheme rules) and also rejects a complaint by a member after such a transfer took place, noting that the pension scheme had complied with industry practice when making the transfer.

Mr Winning: Complaint that transfer made

Two of the new determinations, (PO-5799) and (PO-5930), both of which relate to the same member, Mr Winning - are the first in which the Ombudsman has ruled on a member complaint that a transfer to an alleged liberation arrangement should not have been made.

The member had transferred over £50,000 from two personal pension plans to the "Capita Oak" pension scheme. However, he had since been unable to contact his new scheme. He complained to the Ombudsman, saying that the pension providers should not have allowed him to transfer in the first place.

The Ombudsman rejected the complaint. The transfer application had appeared to comply with all statutory requirements. A member could not be deprived of a statutory right to transfer and to the extent that each provider had a duty of care to the member, it was overridden by their legal obligation to make the transfer.

In considering whether there had been maladministration, the Ombudsman said that he also needed to look at whether the providers had acted consistently with good industry practice. The transfers took place in late 2012, but the Pensions Regulator did not issue guidance about pension liberation until February 2013, guidance which "could be regarded as a point of change in what might be regarded as good industry practice". Present standards of good practice could not be applied to the providers' past actions.

Even if the providers should have carried out greater due diligence that would not necessarily have lead to the reinstatement of the member's benefits: it was quite possible that he would still have proceeded with the transfer in any case.

Mr Harrison: Complaint that transfer blocked

In January, the Ombudsman issued his first determinations about members who complained that they had not been allowed to transfer to suspected liberation schemes. He held on the facts that the pension providers against whom those claims were brought had properly refused the transfers (on the grounds that the status of the receiving schemes did not satisfy the formal requirements that would give the members a statutory right to transfer benefits to them).

The third determination (PO-3184) issued by the Ombudsman this week concerned a member, Mr Harrison, who - like the earlier complainants - complained that his personal pension provider had blocked his attempt to transfer. In this case, the member's right to transfer was contractual, rather than statutory. Nevertheless, the Ombudsman reiterated that a member with a right to transfer (whether statutory or contractual) should not be denied it. In this case the contractual conditions were met, and so the Ombudsman ordered the provider to make the transfer, if the member still wanted it.

What does this all mean for trustees?

Although the new cases again concerned transfers from personal pension providers, the principles are relevant to trustees of occupational schemes who might be faced with similar complaints. They underline that a member's legal right outweighs trustee or provider suspicions of liberation activity.

The Ombudsman's focus on the apparent sea-change in good industry practice in February 2013 means that the Winning determinations are most relevant to transfers made before that date. However, the wider reasoning suggests that where trustees have followed best practice regulatory guidance, as well as the law, the Ombudsman is unlikely to hold them guilty of maladministration for letting a transfer take place.

The Harrison case, on the other hand, should leave trustees in no doubt that they may be in breach of their legal duties where, on suspected liberation grounds, they do not allow a member to exercise an otherwise enforceable right to transfer out.


Which?: New pension rules prove taxing

Before we consider the research by Which? It is worth pointing out that they have included a an on-line calculator, to quote Which?:

"Which? has launched a free online calculator to help people work out the tax they'll pay if they cash in their entire pension pot or take a lump sum. Our previous research found that if someone really did use their pension pot to buy a Lamborghini, they could end up paying enough tax to buy a Porsche."

The calculator ask the user to input the amount to be taken as a UFPLS and also details of their other income. The main issue is that in many cases it will understate the tax deducted and this might cause problems for advisers.

If the inputs of a UFPLS of £30,000 is input with other income in the year of £10,000 the calculator sets out the answer as follows:

"What you get, and what tax you pay

If you cash in £30,000, you will pay £4,380 in tax.

This means you'll receive £25,620 after tax, which includes a tax-free lump sum of £7,500.

Whether you take your whole pot or just part of it, 25% of the withdrawal is tax free. The rest is taxed as income. Making a series of smaller withdrawals over several years can mean less tax than if you take your whole pot at once."

However, that might be the tax liability at the end of the tax year, but in the meantime the pension scheme administrator, following the HMRC guidance set out in Pension newsletters 66 though to 68, will often apply the PAYE Code on a "month 1 basis" and as such will deduct more tax than has been intimated by Which? After speaking to Which?, they have included an explanation as how PAYE works on a "month 1" basis.

Under the Emergency tax Code of 1060L M1, which will be used in the majority of UFPLS payments the tax deducted will be as follows:

UFPLS - - - £30,000.00
Tax-Free Element - - £7,500.00 -
Taxable Element - - £22,500.00 -
- - Tax Rate - -
Personal Allowance £883.33 0% £0.00 -
Basic Rate Band £2,648.75 20% £529.75 -
Higher Rate Band £9,851.25 40% £3,940.50 -
Additional Rate Band £9,116.67 45% £4,102.50 -
Tax Deducted - - - £8,572.75
Net Received £21,427.25
Effective Tax Rate on Taxable Element 38.10%
Effective Tax Rate on Whole UFPLS 28.57%

So, the £8,572 tax deduction by the scheme administrator is almost double that calculated by Which?  This highlights the difference between the PAYE Code of 1060 M1 and the annual tax liability.

Turning now to the Which? survey itself, a summary of their findings are:

  • The majority of people approaching retirement age are confused about how tax works in retirement, according to new Which?
  • Which? surveyed 1,204 adults aged 55 or over and found that 60% of people who are not retired do not know the pension reforms allow you to take up to a quarter of your pot tax-free.
  • One in seven (14%) wrongly think their entire pension pot is tax-free while two thirds (67%) admit they have limited or no understanding of tax issues in retirement.
  • Of those who are retired, only a quarter (25%) think tax has become simpler since retirement. 

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.


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