Confirmation of whether compensation paid for AVC retirement late encashment is subject to Tax

In October of this year, I retired and my LGPS pension came into payment. During my membership of the LGPS, I paid AVCs to an external provider. At the date of retirement, the LGPS contacted the AVC provider and asked for the AVCs to be encashed and sent to them. The intention being that part of the encashment would be used to fund a tax-free lump sum and the remainder to purchase additional LGPS pension. However, the AVC provider delayed the encashment including a period of time when the cash earned no interest. The LGPS was not able to calculate my pension and lump sum until it received the encashment. When the length of the delay was known, I complained to the AVC provider. The AVC provider accepted my complaint and offered to pay compensation. This consisted of interest of £1,601.60, which was based on the Financial Ombudsman Service rate of 8%, plus £150 for distress and inconvenience. The total amount is £1,751.60. I asked for the £1,751.60 to the paid to the LGPS, so that my pension could be recalculated to take account of the actual value of my AVCs. However, the AVC provider has refused to send the funds to the LGPS and are insisting that the whole of the £1,751.60 would be tax free if I took receipt of the money. I have asked the AVC provider to confirm in writing that the funds would not be liable to tax. However, so far, I have not received that confirmation. The taxation of compensation is complicated, and I would welcome HMRC’s guidance.

Hi

Please have a look at the guidance from the Financial Ombudsman Service on pension compensation at Tax on compensation.  We can only provide general advice in this forum.  For an answer to a detailed question of this nature, you would need to contact our self assesment helpline on 0300 200 3310, or seek professional advice.

Thank you