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This a legal question not a pension question

including wills and probate
taken2often
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This a legal question not a pension question

#410230

Postby taken2often » May 8th, 2021, 11:17 am

Coming soon with the markets rising someone somewhere will be 75 in the next few months and face a Life Time Allowqance Test. If over the allowance they will have to pay at least 25% tax on the excess. They see it coming and write to their provider saying they want to pay the tax from outwith the pension fund as they have been building it up for 30/40 years and do not wish to damage it. They have cash elswhere earning nothing. The providers say no. The client then ensures that there is no cash in the fund. The advise the provider that once the Test is carried out the sum due is a tax and it is up to the client to fund this, although the funds do have to go through the providers tax payment system. The provider stills says no. The client then advises the provider tha HMRC allows non tax relief payments into a pension after 75 and this could be used to pay the tax. The provider still says no. the provider then chooses which of the assets they are going to sell to pay the tax. Forced Sale. The Trustees have no say in this transaction. When is a tax not a tax but a punishment for success.

The losess. Say the tax is 60k the annual income within the fund of 4.5% = 2,700x 20 years = 54k if in a sipp it could be 50 years as the beneficeries can continue the fund. Thats just the income the capital gain or loss is an unknown other that using generic average over say 25years.

Do you think that person would have a claim for known damages.

Note The client and provider share joint liability to pay the tax. The terms and conditions allow them to sell assets for charges and tax. The Trustees appear to have no pwers to oversee , so the fund can be raided at any time by the employees of the provider. This appears to be accross the board. There is government rules relating to this but as usual the money would be long gone.

Bob

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Re: This a legal question not a pension question

#410254

Postby scrumpyjack » May 8th, 2021, 12:49 pm

IANAL but the Aegon website has this to say on the legal position

"Both the scheme administrator and member are equally and separately liable for the whole LAC. Payment by one will discharge the other from liability for the LAC, to the extent that it has been paid. To discharge their liability, the scheme administrator will usually deduct the LAC from the excess funds and pay it to HMRC via their online quarterly scheme return.

However, sometimes a pension scheme may choose to pay the LAC from the scheme’s own resources, and so avoid reducing the member’s benefits. For example, if a defined benefit occupational pension scheme promised to pay a member two-thirds of their final salary, but this amount is over the member’s available lifetime allowance and an LAC is due, then the scheme may wish to fulfil its promise to the member and pay the LAC from scheme funds. If a scheme chooses to do this, the LAC paid from scheme funds will also count as part of the excess benefits (‘the chargeable amount’) when calculating the LAC charge. In other words, an additional 25% charge will be due on any money taken from scheme funds to pay the LAC, assuming the excess is taken as income.

The scheme administrator will send details of any LAC due to the member. The member will account for their own liability for the LAC via self-assessment, claiming a credit for any LAC paid by the scheme administrator.

Where the scheme administrator has relied on incomplete or inaccurate information provided by the member and due to this doesn’t pay all or part of the due charge, they may be discharged from their liability by HMRC and the liability for the remaining outstanding charge due will fall solely on the member."

Given that the administrator is 'equally and separately liable for the whole LAC', I can't see you would have any chance of legally challenging their payment of it. The only thing you might do is pay it yourself to HMRC before they have a chance to do so. But you might then be subject to additional tax on the tax payment you have made personally as this is in effect a further contribution to the fund! If you did try to challenge them legally, it would probably be expensive and you might well end up having to pay their costs as well.

taken2often
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Re: This a legal question not a pension question

#410402

Postby taken2often » May 8th, 2021, 10:18 pm

Thanks for the response. What you describe was the first position of a provider. The Tax rules make it clear that if a scheme provides extra funds to compensate for the loss due to LTA Tax then the sum would have to be added to the fund before the test, and tax on it would be due. This is fair as the funds would have come from a tax free source. I maintainb that as soon as the Test takes place the sum due is tax. As usual HMRC are not interested in the source of tax as long as it is legal. In the event that the provider uses their own cash hMRC woul;d accept it so what is wrong with the clients cash.

One provider indicated that HMRC would be unhappy if they did not see the fund depleted. But it turns out that HMRC ask and get no information about the fund. All they ask for is name NI number, how much tax to be paid at 25% or 55%.

Back to the legal question. A sum of tax is due. The client offers the amount to the provider so that they can pay all the taxes due on the due date. They refuse the money and make a forced sale of assets to pay the tax. This creates a known loss as described, would the client have a claim for damages

Any answers will not be legal advice only a personal view


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