The Pensions Ombudsman has held that an employer had a duty of care to inform its employee of the penal tax consequences of being re-employed by his employer less than one month after he had taken early retirement with the benefit of a protected pension age. The Ombudsman directed the employer to compensate the member for the tax consequences which resulted from the member losing his "protected pension age" due to his re-employment.

Background and Facts

It is not generally possible to receive pension benefits before age 55 without incurring penal tax charges. However, under transitional measures put in place at A-day (6 April 2006) some members benefit from a "protected pension age" allowing them to retire from age 50. A member who retires but is re-employed by the same employer within a month will lose his protected pension age.

Mr Cherry was a police officer who took early retirement before 55 with the benefit of a protected pension age. He was re-employed by the same employer within one month, unaware that this would result in loss of protected pension age and thus penal tax charges. 

Ombudsman's Determination

Mr Cherry complained to the Pensions Ombudsman. The Ombudsman agreed that the employer had "no legal obligation to advise individual officers and employees on their tax and pension liabilities" but held that Mr Cherry's employer "had a duty of care to inform Mr Cherry of the tax implications of re-employment on his retirement benefits". The Ombudsman ordered the employer to compensate Mr Cherry for the tax resulting from loss of his protected pension age.

The determination indicates that the issues which arose in Mr Cherry's case have arisen for police forces throughout England and Wales. It appears from the determination that, whilst not making an admission of liability, Mr Cherry's employer was willing to compensate Mr Cherry and other officers in a similar position, recognising that their re-employment within one month was in order to accommodate the needs of the police force. However, until the police officers affected had completed self-assessment tax returns for each tax year up until reaching age 55, it was not possible for either party to be sure of the amount of compensation required. Mr Cherry's legal advisers were concerned that his employer might withdraw its offer of compensation, and therefore wanted an Ombudsman determination to establish Mr Cherry's legal right to compensation.

Comment

The Ombudsman's distinction between advising employees on tax liabilities on the one hand and informing employees of tax implications of re-employment on the other appears to be a very fine one. This case is unusual in that, whilst not admitting liability, the employer appears to have already agreed to compensate the member before the Ombudsman made his final determination. This determination is therefore not necessarily a reliable indicator of the Ombudsman's approach in future. Nevertheless, employers of members potentially affected by this issue should warn members of the potential to incur penal tax charges if they take early retirement and are then re-employed by the same or a related employer. The gap between jobs to avoid this happening may need to be over one month or over six months depending on how similar the new job is to the old one.

Previous Pensions Ombudsmen have shown some reluctance to rule on employment disputes. This determination may indicate an increased willingness on the part of the current Ombudsman to do so.