The Financial Ombudsman Service (FOS) is facing criticism over its decision to order Scottish Widows to compensate a client after a rule change around overseas pension transfers led to a 25% tax charge the ombudsman thinks could have been avoided.
A client of Scottish Widows complained to FOS after the proposed transfer of his pension plan to a qualifying recognised overseas pension scheme (Qrops) became subject to the overseas transfer charge, even though he made the request before the charge came into effect.
The customer, addressed as Mr B, asked the firm about a pension transfer into a Qrops in February 2017. The reply came on 2 March 2017, where Scottish Widows requested the documents required to proceed with the transfer.
The Fos ruling that Scottish Widows should have to pay the overseas transfer charge is ridiculous"
However, new legislation came into effect on March 9, 2017 which meant that transfers to Qrops requested on or after this date would be taxed at a rate of 25%.
Scottish Widows received the remaining documents from the receiving pension scheme on April 5, 2017.
FOS sided with Mr B, stating that, since the transfer query was made before the legislation came into effect, he was not supposed to be charged the 25% tax rate.
"Mr B made his transfer request before 9 March 2017," FOS said.
"The HMRC guidance says that transfers requested before this date aren't liable to the overseas transfer charge.
"And so, while the transfer may not have been able to proceed at that point, it wasn't subject to the overseas transfer charge."
The ombudsman ruled that Scottish Widows should take on the cost of the charge as well as pay the client £100 for the trouble caused.
Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, criticised the decision.
He said: "The FOS ruling that Scottish Widows should have to pay the overseas transfer charge is ridiculous.
"An instruction to Scottish Widows to pay the charge will incentivise the client to transfer when he may not have made that decision if the charge had been payable from the policy," he added, according to the FTAdviser.