This piece first appeared in The Daily Telegraph on 19 June 1999
The text here may not be identical to the published text

Bank error means pensioners miss their tax relief

thousands with mortgage annuities could be affected

Ten thousand pensioners who have taken out mortgages to boost their income in later life should check their mortgage statements carefully after one major High Street bank has admitted it has been charging 20 of its elderly customers too much interest every month for five years. The mistake had gone unnoticed until we took that matter up. Abbey National has thanked Money Go Round for discovering the error and has offered to refund its customers in full.

The bank had failed to pass on a special tax relief to its older customers who had taken out mortgages to purchase annuities. Instead, the relief, which could be worth up to £40 a month, was used to reduce their debt to the bank - on loans which did not have to be repaid until after they die. A lawyer consulted by The Daily Telegraph has said the bank's actions may have been unlawful.

The customers concerned are all well over 70 and borrowed money on the security of their home to buy an annuity to boost their income. These so-called mortgage annuity schemes (or home income plans) were popular from the 1980s until they were withdrawn from the market after changes made in the 1999 Budget. As long as the person was old enough - at least 70 and often much older - the monthly payments from the annuity more than covered the interest payments on the loan and the schemes provided a useful way to turn the capital value of a home into a net monthly income.

The interest due on the loan attracted tax relief at the full basic rate. And when the tax relief on mortgage interest was cut to 20pc in 1994/95, the Government allowed pensioners with home income plans to keep relief at the full basic rate of income tax. That concession has continued as the rate of tax relief on mortgage interest was cut - first to15pc and then in April 1998 to 10pc. From next April mortgage interest tax relief disappears altogether. But in a concession announced by Chancellor Gordon Brown in the March Budget, the 10,000 pensioners who have home income plans will still be entitled to tax relief at the basic rate of income tax - 22pc from next April.

But for more than five years, Abbey National customers have not had the benefit of this concession unless they examined their annual mortgage statement, realised it was wrong, and specifically asked for the correct tax relief to be given them. The bank gave them tax relief at 10pc instead of 23pc when calculating their monthly mortgage interest payments. The balance was used to reduce their loans, even though the plans were specifically designed to boost income and to leave the loan to be repaid from the sale of their home after their death. An official of the bank - who would not be named - said

"They are paying slightly more than is technically due. We are happy to quote a new payment for customers who contact us, but the other customers haven't asked us. As far as I am aware we haven't asked them specifically if they wanted to change."

One sharp-eyed Telegraph reader says he stood to lose nearly £40 a month until he asked Abbey National to check that it was giving him the correct amount of tax relief on his loan. Alan Gilson [correct], 83,of Stockport borrowed nearly £24,000 on his home in 1988 and used it buy an annuity with Eagle Star. Mr Gilson's policy pays him £209 a month. Out of this he has to repay the interest on the loan. But in the last tax year, instead of charging him £114 a month interest, Abbey National sent him a statement showing he would be charged £143. That left him just £66 a month out of his annuity instead of the £95 boost to his monthly income he expected.

"Last year I had to remind them and they sent me a letter saying I was quite correct. They promised to correct it in the February payment, which they did. They also said it would never happen again but I've a feeling it will - ever since it switched over from the National & Provincial I've had to remind them. I won't know if it's worked now until the end of the year."

Asked to comment on Mr Gilson's case an Abbey National spokeswoman initially blamed computers. But then said

"Only Mr Gilson is insisting on having the high rate of tax relief. Other customers want to see the balance of their loan decrease."

But the bank has now admitted they were never offered the choice. It was up to them to ask for it.

Solicitor Richard Barnett of Barnett Sampson, who has acted for hundreds of pensioners who were mis-sold home income plans in the past, told The Daily Telegraph

"This deserves full and careful investigation and may be unlawful. I cannot see how this could be said to be for the benefit of the borrower. There is no obvious benefit to a home income plan borrower in reducing the balance to the detriment of the income which was the whole purpose of the scheme. These customers should be given an immediate refund with interest."

Abbey National has gone part of the way. In a statement it said

"We are grateful to The Daily Telegraph for bringing this matter to our attention. We apologise to those customers who have been disadvantaged and we will be writing to the individuals affected to inform them of the error. We will also be happy to backdate the tax relief [so] no customer has lost out."

19 June 1999

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