If you were given poor defined benefit (DB) pension transfer advice, you may be owed redress. Find out what a redress payment is and how it’s calculated.
Redress is about putting things right if you were given unsuitable advice to transfer out of your defined benefit or ‘final salary’ pension scheme[1].
If you were given poor advice, your adviser must work out what you could be owed.
A redress payment is intended to put you back in the financial position you would have been in had you remained in your defined benefit pension scheme.
How the redress will be calculated
Your calculation is specific to your personal circumstances, such as age and length of service, so you shouldn’t compare your offer to others, even with those who appear to be in a similar position to you.
Firm must also use some economic assumptions, to work out:
- in retirement, how much money you would have received each year from your DB scheme
- what it would cost to buy an annuity[2] that provides a guaranteed income similar to what you would have received from your DB scheme when you retire
- what that annuity would cost in today’s money
If the cost of the annuity today is higher than the current value of your personal pension, then the firm who advised you should make up the difference.
We expect advisers to use our redress guidance to work out the redress calculation fairly. We’ve made changes to this that come into effect on 1 April 2023.
The aim of redress is to give you enough money to buy an annuity[2] when you retire. This should give you a guaranteed income similar to what you would have had from your DB scheme.
The amount you’ll need to do this will depend on:
- Your personal circumstances, such as your age, marital status, the DB benefits you accrued and when you accrued them
- How much your DC fund was worth at the time of your calculation
- What financial markets expect to happen in the future, at the time of your calculation (such as future inflation and future investment performance).
For example, annuities are currently cheaper to buy and expected to remain so, so you may receive a lower redress payment than would have been offered last year. But you shouldn’t wait to claim your redress just because of changes in the economy.
Tax charges on your redress payment
Your payment has been calculated with the tax information you provided so there shouldn’t be any tax charges.
If your offer is over £500,000 and you’re unsure about how accepting the offer may affect your tax payments, you should contact HMRC.
If your redress is paid into a defined contribution (DC) pension
When some or all of your redress is paid into a DC pension (also referred to as ‘augmentation’), it’s reduced to allow for tax relief. If you pay basic rate tax, your pension provider will claim the tax relief from HMRC and add it to your pension. If you pay higher rate tax, you can claim additional tax relief from HMRC.
If you don’t claim any additional tax relief, you’re less likely to be put back in the position you should have been in if you’d received suitable advice.
Pension contributions that exceed HMRC’s limits in any tax year aren’t eligible for tax relief. Any tax relief granted would need to be paid back to HMRC.
You can ask your firm to work out how much redress can be paid into a DC pension without incurring any tax charges, with any left-over from this paid in cash.
If your redress is paid to you in cash
When some or all of your redress is paid to you in cash, this is reduced to allow for the tax you would have paid on your income during retirement, assuming you would have also taken a full tax-free lump sum upfront.
Find out more on how to claim tax relief or an exemption[3].
You should consider putting as much of your redress as possible back in a DC pension. This will give you the best chance of getting back the DB benefits that you lost.
What to do with your redress payment
The aim of your payment is to put you back in the position you would have been in if you’d received suitable advice.
It’s assumed that you’ll invest your payment in a personal pension. This can then grow to allow you to buy an annuity that provides a guaranteed income on retirement.
You don’t have to buy an annuity, but it’s the best way to obtain a guaranteed lifetime income, similar to the benefits from your DB scheme.
MoneyHelper[4] has more information on where to find financial advice, including their Pension Wise[5] service for over 50s.
Changes to the methodology
We carry out periodic reviews of how redress is calculated for pension transfers to make sure the approach is still right.
In January 2022, we commissioned Deloitte to carry out an independent review[6] of our redress calculation methodology. Their view was that the approach was still correct.
Following this we consulted on changes to it between early August and late September 2022. We proposed a small number of improvements to how redress is calculated in some cases. These changes will come into effect on 1 April 2023 to give firms time to prepare.
Our changes should help ensure that redress calculations are more consistent and as responsive as possible to your individual circumstances.
The changes we’re making will mostly affect:
- People currently married or in a civil partnership who are retiring in less than 5 years. We’ve changed the assumption about whether you’ll be married or in a civil partnership when you retire.
- People paying product charges of less than 0.75% per year and/or advice charges of less than 0.5% per year. We’ve changed the level of future charges that firms will have to allow for when calculating redress. Ask your adviser if you don’t know what charges you’re currently paying.
- People not currently in an advice arrangement. Firms will have to compensate you for the cost of initial advice from a new adviser and ongoing advice charges of 0.5%.
The changes will make it more likely that payments for these people will be enough to buy an annuity[3].
If you think the changes may apply to you, you may want to wait for your redress calculation until 1 April 2023.
If you don’t think the changes apply to you, then it’s unlikely you will benefit from waiting.
If you choose to wait until 1 April 2023
If you choose to wait to have your redress calculated, we don’t expect firms to carry out a calculation now, even if it’s just to provide an indication of what you might receive.
You’ll also need to make sure that you’ve complained to your firm before the deadline. This is usually within 6 years of receiving the unsuitable advice or, if later, within 3 years of becoming aware (or when you should reasonably have become aware) that you had cause to complain.
Once the changes have come into effect, we expect your firm to provide you with an offer as soon as possible. It’s unlikely that you’ll receive an offer immediately, as the firm will need to collect information and carry out and check the calculation.
If you choose to start your claim now
Equally, if you go ahead with having your redress calculated before we’ve made any changes to the methodology, we don’t expect firms to recalculate your redress once changes have been made.
What to do if you think the calculation is wrong
If you think your payment offer is wrong, or the wrong details have been used to calculate it, you should let your firm know first.
If you’ve complained to your firm and are unhappy with their response, you can complain to the Financial Ombudsman Service[6] free of charge. You must do so within 6 months of the date of the final response letter from the firm.
If you’d like free guidance on money or pensions, or need help with where to go for support, you can also contact MoneyHelper[7].
If we find that a firm is routinely failing to follow the redress calculation methodology, it must make changes.
Allowance for investment charges from 1 April 2023
Charges included in your redress
| Types of charges | Included | Level covered |
|---|---|---|
| Investment charges you have already incurred | Always | In full |
|
Allowance for future investment charges:
|
Only when you are not yet retired |
0.5% for ongoing advice charges 0.75% got product charges |
| Allowance to get new advice | Only in some circumstances (ask your adviser) |
2.4% (min £1,000 / max £3,000) |
Your redress calculation should include all the past ongoing product charges you’ve paid out of your current defined contribution (DC) pension scheme.
These can include:
- platform charges
- ongoing fund charges
- administration fees
- custody fees
- transaction costs
If the calculation assumes you’re not yet retired, your offer should also include an allowance of 0.75% (or up to 0.75% before 1 April 2023, if the actual rate you pay is lower). This allowance is for future ongoing product charges until your assumed retirement date.
You should ask your adviser whether your current pension investments are suitable for someone who has received redress. Tell them if your aim is to have the same income that you gave up when you transferred.
If you’re paying pension product charges higher than the 0.75% covered in your redress payment, then you may not be put back in this position. You should speak to your adviser about reducing your product charges.
Advice charges
Your redress calculation takes account of all past advice charges you have paid out of your DC pension.
If the calculation assumes you are not yet retired, your offer should also include an allowance of 0.5% (or up to 0.5% before 1 April 2023, if the actual rate you pay is lower) until your assumed retirement date.
If you’re paying advice charges higher than the 0.5% covered in your redress payment, then you may not be put back in this position. You should speak to your adviser about reducing your advice charges.
If they refuse, you can shop around for another adviser. You can find out more about adviser fees at MoneyHelper[8].
Changing your adviser
You may have ended your contract with the firm that gave you the wrong advice after you raised your complaint. If you did, they should have given you a clear explanation of the effect that this would have on your redress calculation.
If you’re now receiving advice from another firm, the one doing your calculation should factor in your current ongoing adviser charges.
If the firm that advised you ended your contract after, or in anticipation of, your complaint, they should factor in the adviser charges you would have paid if they hadn’t ended the contract.
For redress calculations after 1 April 2023, if you’re not receiving regular advice from another firm, the one calculating your redress will have to compensate you for the cost of initial advice from a new firm.
Firms will also have to compensate you for ongoing advice charges of 0.5%, even if you’re not currently paying ongoing advice charges.
Claiming for other losses
You should tell your firm if you feel you’ve suffered any other losses because of their unsuitable advice. This could include money you had to pay to get tax advice, or any tax charges.
When you make this claim, make sure you provide as much relevant information as possible, including documents to support your claim.
Firms will have to consider if the losses you’re claiming for are a direct result of their unsuitable advice and whether these were reasonably foreseeable. They may need to ask you for more information to make their assessment.
If the firm decides they owe you compensation for these losses, they’ll add this to your redress offer.
What to do after you receive your offer
When you receive your offer, you should check your personal information. If you wish to accept the offer, you need to let your firm know within 3 months. They then have 28 days to pay your redress by the method you choose. Payment can be made either in cash or paid into your pension, or a mixture of both.
Your redress payment will be increased to reflect how it would expect to grow between the date it was calculated and the date you receive it.
You don’t have to accept the offer if you don’t want to. If you’re unhappy with the redress offer, you should complain to your firm first.
If you’re unhappy with their response, you can complain to the Financial Ombudsman Service[9] within 6 months, free of charge.