RPSM03104511 - Technical Pages: Protecting pension rights from tax charges: Enhanced protection: Relevant benefit accrual: Compensation

Compensation paid to other money purchase arrangements

The payment of compensation into an other money purchase arrangement after 5 April 2006 could be a relievable pension contribution and so will trigger loss of enhanced protection. Whether or not it is will depend upon the nature of the compensation.

An individual might be awarded compensation following poor advice that the individual received in respect of their pension saving that has enhanced protection. The compensation might be for the mis-selling of a pension scheme, such as being advised to join a personal pension scheme as opposed to staying in an occupational pension scheme. Alternatively, an individual might be awarded compensation for the mis-selling of a pension-related product, such as being advised to invest pension saving in a particular form of investment fund when investment in another type of fund should have been undertaken or for the poor performance of a particular investment held for the purpose of a registered pension scheme, meaning that the value of the investment is less than it should be.

In general where, as a result of an individual being awarded compensation for poor advice, mis-selling, poor administration of the pension scheme or poor performance of a particular investment,

• the individual receives the compensation and then uses it as the wherewithal to make a payment into his or her pension saving, or
• the individual directs that the compensation is paid directly into his or her pension saving instead of receiving the payment personally, or
• the person paying the compensation is required or otherwise decides to make the payment directly into individual’s pension saving and, in either case, the individual had no choice in the decision,

the payment into the pension saving will be a relievable pension contribution by or on behalf of the individual and will trigger loss of enhanced protection.

Alternatively, the trustees of a pension scheme might seek compensation, such as following problems regarding poor performance of a particular investment chosen by the trustees meaning that the value of the investment is less than it should be or because the trustees received poor advice. Where the trustees are awarded compensation, such a payment would not be a relievable pension contribution and enhanced protection will not be lost.