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Lancashire County Council (20 002 098)

Category : Benefits and tax > Other

Decision : Upheld

Decision date : 09 Apr 2021

The Ombudsman's final decision:

Summary: Mr X complained the Council gave incorrect advice about how his pension would affect his benefits. This resulted in him owing money to Her Majesty’s Revenue and Customs. The Council accepted fault and agreed to offer Mr X a remedy.

The complaint

  1. Mr X complained the Council gave incorrect advice about how his pension would affect his benefits. This resulted in Mr X owing more than £9,000 to Her Majesty’s Revenue and Customs (HMRC) and he is now financially worse off than he was advised he would be.
  2. Mr X and his family have suffered distress and worry as a result of the Council’s advice.

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The Ombudsman’s role and powers

  1. We investigate complaints about ‘maladministration’ and ‘service failure’. In this statement, I have used the word fault to refer to these. We must also consider whether any fault has had an adverse impact on the person making the complaint. I refer to this as ‘injustice’. If there has been fault which has caused an injustice, we may suggest a remedy. (Local Government Act 1974, sections 26(1) and 26A(1), as amended)
  2. When considering complaints, if there is a conflict of evidence, we make findings based on the balance of probabilities. This means that we will weigh up the available relevant evidence and base our findings on what we think was more likely to have happened.
  3. If we are satisfied with a council’s actions or proposed actions, we can complete our investigation and issue a decision statement. (Local Government Act 1974, section 30(1B) and 34H(i), as amended)

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How I considered this complaint

  1. As part of the investigation, I have considered the following:
    • The complaint and the documents provided by the complainant, as well as the information we discussed in a telephone conversation.
    • Documents provided by the Council and its comments in response to my enquiries.
  2. Mr X and the Council had an opportunity to comment on my draft decision. I considered any comments received before making a final decision.

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What I found

What happened

  1. Mr X is disabled and can no longer work, he therefore receives benefits which include tax credits.
  2. Mr X told me he got into debt when he had to adapt his home when his son came out of hospital. When he received a letter from his pension provider about taking his pension early, he saw an opportunity to pay off some of his debts. He wanted to know if taking his pension early would impact on his benefits or tax credits. Mr X had taken advice from HMRC before, but it was wrong. He had received helpful benefits advice from the Council before, so decided to take its advice again.
  3. Mr X telephoned the Council on 18 November 2019 and explained the issue to an advisor he had received advice from before. The advisor arranged to meet Mr X in person on 21 November.
  4. According to the advisor’s record of their meeting, Mr X planned to cash in his occupational pension but was not sure whether to take it as one lump sum or as a small lump sum with an ongoing monthly income. Given his current debts, Mr X preferred the single lump sum option and wanted to know how this would affect his benefits. The advisor noted Mr X’s only income-based benefit was tax credits, which Mr X said was a small amount, but he did not provide exact details. The advisor told Mr X he could take the lump sum and it would not affect his benefits.
  5. According to Mr X, his debts were manageable, and he was meeting them, but taking his pension early and paying off some debts could place him in a better situation.
  6. Mr X chose to take his pension early and received a single lump sum on 31 December 2019.
  7. In early 2020, Mr X received a letter from HMRC telling him his income for the previous year was higher than the threshold and he was not entitled to any tax credits for that year. He was therefore told he must repay over £9,000, which HMRC would take gradually from future tax credit payments. That meant Mr X’s tax credits were reduced by about £40 a week.
  8. Mr X telephoned the Council on 1 May and left a message telling the advisor what happened.
  9. The advisor called Mr X back on 4 May and confirmed the advice he gave Mr X was wrong. The correct advice should have been that up to 25% of the lump sum would be ignored but the remainder counted as income. Mr X asked what the Council would do to put things right. The advisor said he would discuss this with his manager.
  10. The advisor’s manager reviewed the situation and concluded of the two possible choices; she would have advised Mr X to take the single lump sum. That was because it only impacted Mr X’s tax credits for one year. He will continue to receive tax credits, but with a small reduction to recover the overpayment. If he had taken the smaller lump sum and ongoing payments that would impact his means tested benefits going forwards. The manager emailed Mr X on 12 May confirming their view, and to apologise for the incorrect advice.
  11. Mr X replied on 15 May. He said he did not need to take the lump sum pension as he was managing. The money helped him clear his debts quicker. If he had known the consequences, he would not have taken the single lump sum. He acted on the Council’s advice and is now in debt to HMRC and his tax credit payments have reduced. He wanted the Council to pay the HMRC debt or compensate him.
  12. The Council logged this as a complaint and sent a final response on 3 July 2020. It said:
    • Mr X contacted the welfare team in September 2019 for support about debt management. He said he was in so much debt he could not afford to lose any of his wife’s income.
    • Mr X contacted the Council’s welfare team in November 2019 because he was thinking of cashing in his pension and wanted to know how it would affect his benefits. He told the advisor he had two choices, one lump sum or small lump sum and ongoing weekly pension. Mr X preferred the first choice because of his debts at the time.
    • The advisor gave incorrect advice. They should have told Mr X the first 25% of the lump sum would be tax free but the rest counts as income.
    • It was satisfied the advisor understood Mr X’s situation and his need to cash in his pension to clear his debts, and that it was a better choice to take the single lump sum.
    • The cause of the overpayment and debt to HMRC was the lump sum Mr X received and not the advice he received from the Council.
  13. Mr X brought his complaint to the Ombudsman on 22 July 2020 because he was not satisfied with the Council’s response.

Response to my enquiries

  1. The Council told me, based on the information Mr X gave, it would have recommended the same to anyone seeking its advice. The option Mr X chose was the best available to him because it meant he could remain on tax credits, even though his entitlement in that year reduced to nil. Recovery of tax credit overpayment will continue in future years awards, but the rate of recovery will be low. The Council therefore considers the impact to be minimal.
  2. The Council said it did not advise Mr X to cash in his pension. The notes of his discussions confirm he had already made his decision to do that, but he wanted advice about what his best option was. The Council believes Mr X chose the best option based on his circumstances.
  3. The Council does not accept its advice caused the overpayment and said Mr X did not give full information about the amount of tax credit he received. He said it was only a small amount, which is not the case.
  4. The officer who advised Mr X told me he took details of Mr X’s main benefit awards, which are paid at fixed rates, but Mr X did not give an actual figure for his tax credits. He just said it was a ‘small award’.
  5. The officer recorded Mr X was planning to cash in his private pension and wanted to know which of the two options he presented would be most beneficial. His preferred option was already the lump sum. Regrettably, the officer told me he failed to obtain exact details of what tax credits award Mr X received. His mistake was failing to check what affect a lump sum from a private pension would have on Mr X’s tax credits.

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Analysis

  1. Responding to my draft decision, Mr X was adamant he did give the Council details of his tax credits. He told me this was his only income-based benefit, and there would be no point him attending the meeting without it. Regardless of whether or not Mr X gave full details about his tax credits, it does not change the way lump sums from pensions are treated for tax purposes. This is something the advisor should have gathered more information about before advising Mr X, and does not alter the fact the advice was wrong. The officer did admit his advice was wrong and I understand Mr X accepted the officer’s apology.
  2. As far as the Council is concerned, Mr X had decided to cash in his pension no matter what so that he could pay off debts he was struggling with. He just wanted to know which of the two choices would be more financial beneficial to him.
  3. Mr X disagrees. He said he could manage his debts and did not need to take the lump sum pension.
  4. I have seen the Council’s records of the welfare officer’s discussions with Mr X. It does appear Mr X gave the impression he was struggling with debts and had decided to cash in his pension so he could pay some of those debts off.
  5. It is not possible for me to say with certainty what Mr X would have done if the Council gave him the correct advice. However, on balance, I consider the evidence suggests Mr X was struggling and did need to pay off his debts so would have still chosen to do so. I therefore do not consider the Council was at fault for its stance here.
  6. I have seen the Council’s calculations of Mr X’s financial position if he chose to take the single lump sum or the smaller sum with ongoing payments. I agree this suggests Mr X is financially better off having chosen the first option. Although his tax credits will be slightly less until the overpayment is repaid, Mr X has reduced his monthly outgoings by a much larger amount by paying off some debts. He is therefore in a better financial position.
  7. Mr X is unhappy with the Council’s response because although he may be better off in the short term, his pension is now gone, and he is worse off than the Council said he would be.
  8. Mr X is correct that he is worse off than the Council told him he would be. However, I do not consider the Council is liable to pay the HMRC debt. HMRC have not taken any money from Mr X, it will pay him about £40 less a week until the balance is cleared. As above, I have not seen evidence to say Mr X is financially worse off because of the Council’s advice, or that he would not have cashed in his pension anyway. I am not qualified to say what the exact financial impact on Mr X is. He would need expert financial advice to determine this. I therefore do not consider there is any basis on which to recommend the Council should pay the debt to HMRC.
  9. I do sympathise with Mr X about the shock of being told he must pay back over £9,000 to HMRC. The Council’s wrong advice raised Mr X’s expectations and led him to wrongly believe he could take a single lump sum pension with no adverse impact on his benefits. Given Mr X’s financial position, it was distressing for him to learn he owed over £9,000 to HMRC and his tax credits were being cut. I consider that distress was significant. That is Mr X’s injustice, and the Council agreed to offer a remedy.

Agreed action

  1. Within four weeks of my final decision the Council agreed to pay Mr X £300 to recognise the distress its wrong advice caused.

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Final decision

  1. I have completed my investigation. The Council accepted fault and agreed to offer Mr X a remedy.

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Investigator's decision on behalf of the Ombudsman

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