Prudential (PRU.L) has agreed to reimburse 39,000 customers to the tune of £4 million after the provider failed to claim back tax credits on investment returns for four years.

Policyholders of Scottish Amicable unit-linked pension plans were affected by an error between June 2004 and December 2008.

Prudential said the error came about as a result of an administrative error when the funds were transferred to Prudential and that the Financial Services Authority was alerted as soon as the issue was identified internally in 2008.

Tax is deducted from investment income earned by unit-linked pension funds and recovered against Prudential's tax liability.

Steve Colton, director of communications at Prudential, explained that some inconsistency in the way tax credits were paid for, was originally identified as part of a routine audit.

He explained, ‘There is no consistent market practice for the treatment of tax credits. To ensure that we are treating all of our unit-linked customers fairly, we decided that all our unit-linked funds should be priced on an equal footing.

‘As a result, the treatment of these 'credits' was changed in June 2008 and the unit prices for the affected funds for in-force policies was amended in December 2008.’

Prudential said that, for customers who have transferred, switched or partially surrendered their unit holding during the period from June 2004 to December 2008, they will be put back into the position they would have been in, had the tax credit been paid into their fund.

Colton added, ‘The amounts we are paying to affected customers are to correct the value of their holdings which were undervalued when they were sold. These are not compensation payments.’

In addition to the correction being made to customer policies, additional sums are being paid to address potential loss in investment growth.