Case sparks warning on understanding your finances
A RECENT Pensions Ombudsman Service decision that found that Standard Life did not mislead a customer about the value of his pension pot has highlighted the need for individuals to understand their own financial affairs.
The customer, identified in the ombudsman’s determination as “Mr E”, had complained that Standard Life gave him incorrect information about the value of his pension pot, leading him to increase the amount he invested in other plans and ultimately exceed his lifetime allowance.
Set by the UK government at £1 million, the lifetime allowance is the maximum sum an individual can save in a pension pot without paying tax. As Mr E had exceeded that amount, he incurred a tax charge on all savings above that limit.
Mr E complained to the ombudsman because he had assumed that the term “final plan value” on his statement took account of the guaranteed minimum pension (GMP) he was entitled to under pensions reforms brought in in the late 1970s.
From 1978 the UK Government topped up the state pension with an additional earnings-linked pension, but employees could “contract out” of this by paying lower national insurance contributions in return for additional payments from occupational or personal pensions instead. By doing so they were entitled to a GMP.
According to Mr E Standard Life misled him by not making it clear that his GMP was not included in his final plan value. Deputy pensions ombudsman Karen Johnston disagreed.
“Mr E assumed that the final plan value included the value of the GMP and concluded that it could be used for lifetime allowance planning purposes without further calculations being done,” she said.
“I do not think that the information in the statements supported that assumption or that conclusion.”
Ms Johnston added that while she believes Mr E misunderstood the meaning of the term “final plan value” she “did not find that the misunderstanding was created by anything said or done by Standard Life”.
Leon Buckley, director of financial planning at Tilney Bestinvest, said that with auto-enrolment bringing many more people into the pensions-saving market it is vital that individuals understand the information contained in documents such as statements.
“There’s a degree of standardisation to the annual statements we all receive and one of the key things they provide is illustrations,” he said.
“That’s a really important factor in this because a lot of people don’t really think much about what goes into that.
“There are a lot of assumptions that go into pensions illustrations to do with performance, gilt rates and interest rates and any change in those can have a significant impact.”
The illustrations provided by pensions companies generally offer customers best- and worst-case examples of what they might receive from their savings on retirement.
While Mr Buckley believes it is crucial for savers to receive such illustration each year, he admitted that they can be difficult to understand without some degree of knowledge on financial matters.
“They are not as clear as they could be,” he said.
“If I was given my way they would provide some kind of benchmark and a better explanation of what the numbers mean.”
As it stands, Mr Buckley said the only way to be sure of understanding such documents is to take financial advice, something that is not always an option, particularly for people on lower incomes.
“The only real answer is to get advice because if you phone the provider you’ll just get the same information repeated back at you as they won’t be able to give extra guidance,” he added.
Amber Heron, tax manager at law firm Harper Macleod, noted that while Mr E’s case is unusual in that his savings were in the £1m-plus bracket, the premise for wealthier savers is the same.
“This case highlights the importance of taxpayers, and in this case pension contributors, understanding their own finances to ensure they comply with the legislation in order that they do not exceed the set limits and incur a tax charge,” she said.
“The onus is not on the pension provider to advise contributors, merely to invest and report on their contributions.
“It is perhaps unlikely that auto-enrolment will increase the number of pension contributors exceeding their lifetime allowance, as often those auto-enrolled are lower earners and by default make lower contributions, but it is not by any means impossible. It highlights the importance of seeking advice from your tax adviser or IFA in order to ensure certainty where appropriate.”
Notably Mr E, who was described by Ms Johnston as a “sophisticated investor”, did not contact a financial adviser prior to making additional payments into his pension plans.
“I find that on the balance of probabilities he acted in reliance on his own interpretation of what ‘final plan value’ meant and how it could be used when he invested additional monies into [his other pension plans],” Ms Johnston said.
“Ultimately this led him to exceed the lifetime allowance and pay the tax liability for doing so.”
A spokesman for Standard Life said: “We always do our best to ensure our communications are clear to customers, as we want them to achieve the best retirement outcomes.”
‘‘ If I was given my way they would provide some kind of benchmark and a better explanation of what the numbers mean