Determining payment of redress under FCA DISP App 4.

The two main ways in which redress can be provided under FCA DISP App 4 are by augmentation of the consumer’s pension or by cash payment. (A third route — purchase of an annuity — is not covered in this note.) The decision rests on consumer choice, on whether augmentation is available, and on the transaction, advice and tax considerations that follow. The note below sets out how each route works in practice and how the calculation differs between actual-loss and prospective-loss cases.

Redress can be provided as part augmentation and part cash — in particular if there are limits on the amount of augmentation, or to avoid exceeding a limit that incurs income-tax charges. Our understanding is that if augmentation is chosen, the Secondary Compensation Sum and the Additional Compensation Sum will not be included in the augmentation but will be paid as cash.

Payment of redress in cash — in respect of the Primary Compensation Sum — requires a tax adjustment, specifically a deduction. The purpose is straightforward: pension payments from the personal pension are subject to income tax, but redress paid as cash is not. Without the adjustment, there would be over-compensation. Where augmentation enables further Pension Commencement Lump Sum (PCLS) payments, no tax adjustment is made in respect of those PCLS payments.

Actual-loss cases

Actual-loss cases are those where, at the valuation date used for the calculation (the first day of the quarter in which the calculation is made), the consumer would have already reached the retirement age of the defined-benefit scheme. Unlike prospective-loss cases, actual-loss cases require the Primary Compensation Sum to take account of historical payments — both for the counterfactual situation (assuming the consumer had remained in the defined-benefit scheme) and for the actual situation.

Historical payments would have been paid (under the counterfactual situation) or have been paid (under the actual situation) to the consumer. Interest roll-up has to be taken into account for these payments, and so does income tax — but only to the extent set out below.

For the counterfactual situation, the historical payments are the PCLS and the pension payments from retirement age up to but not including the valuation date. The PCLS is tax-free, but the pension payments are subject to income tax. The appropriate marginal income-tax rate has to be agreed between the respondent and the consumer, and applied to the pension payments. For the actual situation, the calculation requires any historical payments to be determined and whether they were before or after retirement age — no tax adjustment is made for payments before retirement age, but a tax adjustment is made for pension payments after retirement age.

As a procedural matter, the actuary may have produced figures that take account of interest roll-up but do not take account of income tax on historical payments — because the actuary is not in a position to determine the appropriate marginal income-tax rate. Where this is the case, the figures provided will require the tax adjustment to be applied separately. If the marginal income-tax rate is determined to be 20%, for example, the provided figure will be reduced by 20%. Note that if this is done, the Primary Compensation Sum has to be re-determined — and if it ceases to be a positive amount, this means that no redress is in fact due.

Given that we are dealing with an actual-loss case, the specific facts of the actual situation should be available and will need to be agreed between the respondent and the consumer. If it is determined that no further PCLS payments are possible, the tax adjustment will be a deduction at the marginal tax rate agreed between the respondent and the consumer — if the marginal income-tax rate is 20%, the provided figure will be reduced by 20%. But this should not be assumed without the investigation indicated. It is also necessary to consider the consumer’s entitlement to means-tested state benefits, and whether that entitlement is affected by the provision of redress. This will need to be agreed between the respondent and the consumer.

If the process above is completed, it will also provide the information required for any Secondary Compensation Sum. The process will inevitably mean that there is a period of time between the valuation date used for the calculation and the actual provision of redress, so an Additional Compensation Sum will need to be calculated and paid in addition. We suggest a proposed latest settlement date is set out in the offer letter — for example, 28 days following the date of the offer letter — but the amount of the Additional Compensation Sum will need to be revisited if the settlement date is going to be later.

Prospective-loss cases

Prospective-loss cases are those where, at the valuation date used for the calculation, the consumer would not yet have reached the retirement age of the defined-benefit scheme. For the counterfactual situation, there are no historical payments. For consistency, if there have in fact been historical payments under the actual situation, they need to be ignored — this is done by increasing the amount of the personal pension used in the calculation to the amount that would have applied if the historical payments had not occurred (although the investment return assumed on the historical payments is the Bank of England Base Rate from time to time, instead of the personal pension fund performance). The amount must be determined by, or determined according to methods approved by, an actuary.

The other difference for the purposes of this note is in regard to how the PCLS impacts the tax adjustment for payment of redress in cash. The calculation methodology is that at retirement age the PCLS will be taken and will be 25% of the fund (unless, exceptionally, the amount of PCLS is limited by HMRC rules in large cases).

The standard assumption regarding the PCLS means that where payment of redress in cash — in respect of the Primary Compensation Sum — requires a tax adjustment, the rate will be (100% − 25%) = 75% of the marginal tax rate agreed between the respondent and the consumer. If that marginal tax rate is 20%, the tax adjustment will be 75% of this, or 15%. By comparison, for actual-loss cases, because the consumer has reached retirement age it is necessary to consider the actual situation to ensure that a correct result is obtained for the tax adjustment for payment of redress in cash.

The various other considerations mentioned in regard to actual-loss cases will apply.

For the firm’s broader approach to FCA-regulated redress and remediation work — including DB transfer redress under DISP App 4, defined-contribution redress covering the underlying assets within the pension wrap, and high-volume past-business reviews — see Redress & remediation.

Last updated May 2026.