The Deputy Pensions Ombudsman (DPO) has determined that neither the trustee, employer nor administrator of a defined benefit pension scheme had a legal duty to warn the member that the reduction in the annual allowance from 6 April 2011 would make him personally liable for an annual allowance charge if he elected to receive a major enhancement to his scheme benefits after that date. This was despite the fact that the respondents were aware that the reduction might have tax consequences for the member and that they were in correspondence with HMRC.
The DPO dismissed a complaint by a member (R) who submitted that he would have elected to take the enhancement before 6 April 2011 if the respondents had warned him about the tax change. She held that:
- the trustee did not breach its duty to act in the best interests of scheme beneficiaries as the complainant was not a member at the time he elected to take the enhancement but only joined the scheme on doing so;
- the employer had no common law duty to warn R of the financial benefits of making an election before 6 April 2011; and
- both the employer and the scheme administrator had met their obligations under the relevant regulations.
In addition, the respondents' correspondence indicated that they were not giving advice and it was not clear to any of them by 6 April 2011 that a tax charge would definitely arise for members such as the complainant.
If a member of a registered pension scheme accrues benefits (or makes contributions) exceeding the annual allowance in a pension input period ending in a tax year, he is liable to pay an annual allowance charge. The annual allowance was reduced from £255,000 to £50,000 at the start of the 2011/12 tax year as part of the coalition government's measures to restrict the availability of pensions tax relief. A member is entitled, however, to carry forward unused annual allowance from the previous three years. For the 2008/09 to 2010/11 tax years, the amount that could be carried forward was restricted to a deemed annual allowance of £50,000 in each year.
On 6 April 2014, a further reduction to £40,000 was made to the annual allowance.
R was employed by the company later named Honeywell Normalair-Garrett Limited (the Company) and was a member of a DB scheme in which it participated (the Old Scheme). In 1998, the Company was sold and the Old Scheme closed to future accrual. R was given membership of what later became a section of the Honeywell Retirement Plan (HRP), a DC scheme established by the Company's eventual parent. The Company gave eligible employees, including R, the option when they left the Company of electing to transfer their HRP benefits to a DB arrangement, the Honeywell UK Pension Scheme (the Scheme), at the level they would have received if they had continued to accrue benefits in the Old Scheme until leaving the Company (the Special Arrangement).
In the weeks leading up to 6 April 2011, R considered retiring but, he later submitted, was told by the Company's human resources department that it was too busy to process his request at that time. A letter to R from the Scheme administrator, (the Administrator), dated 11 May 2011 enclosed the relevant forms for making a Special Arrangement election, as well as a retirement estimate which stated that it did not constitute financial advice from the Scheme trustee (the Trustee). The letter said that if he wanted to consider the estimates “on a different basis” or needed any financial advice, he should contact an independent financial adviser.
R decided to retire under the Special Arrangement and signed the relevant forms on 14 May 2011. The Trustee wrote to him on 13 December 2012 to say that the enhancement to his Scheme fund under the Special Arrangement had resulted in a pension input amount of £215,603.64 in the 2011/2012 tax year, triggering an annual allowance charge of £7,553.43 (after carrying forward three years' annual allowance), which was personally payable by him.
R complained to the Ombudsman's office that the Company, the Trustee and the Administrator should have informed him that a personal tax liability would arise if he elected to take his benefits under the Special Arrangement after 5 April 2011. If they had done so, he would have made his election earlier to avoid this charge.
Letters submitted by the respondents made clear that they were aware that the new tax rules from 6 April 2011 could raise issues for those making elections under the Special Arrangement from that date. The Company and Trustee were in lengthy discussions with HMRC during this time and submitted that HMRC only confirmed in late 2012 that there definitely would be a personal tax charge for affected members.
The DPO dismissed the complaint, and determined that:
- none of the respondents had a legal duty to inform R about the change in the law that led to the annual allowance charge:
- the Company’s duty lay in providing the Administrator information required under the relevant regulations to assist with the production of a pension saving statement, which it had done;
- the Trustee’s duty was to act in the best interests of the Scheme members. Following Cowan v Scargill, this essentially meant their best financial interests. There was no breach of this duty as R was not a member of the Scheme at the time he made his election, only afterwards; and
- the Administrator’s duty was to provide a pension savings statement automatically each year to members exceeding the annual allowance in the relevant pension input period. The Administrator had complied with this obligation.
- the Administrator’s letter to R dated 11 May 2011 confirmed that it was not providing advice on whether R should make a Special Arrangement election. None of the respondents had advised on this matter but it had been made clear to R that seeking any financial advice required was his own responsibility; and
- in the discussions between HMRC, the Company and the Trustee it was not clear whether an annual allowance charge would definitely be payable by R as a result of the change in the annual allowance level on 6 April 2011, and the respondents could not reasonably have been expected to R prior to that date whether or not he would be subject to such a charge.
The DPO also noted that any delay by the Company's human resources department in being able to process his retirement was irrelevant, as there was no suggestion that the department knew about the potential tax charge or that it would be to the Company's advantage to put off R's Special Arrangement election.
She also held that if R had been warned about the annual allowance charge after 5 April 2011 but before he made his election, he would not have acted any differently as the enhancement he received in the Scheme far exceeded the tax charge.
The complainant was perhaps unlucky not to have succeeded in this instance although, given the sums involved, many others in his position would have been likely to seek financial advice, which should then have resulted in R’s avoiding the tax charge. However, the changes to the annual allowance regime in 2011/12 were significant and at the time they were introduced, several uncertainties remained, such as the operation of the carry-forward provisions. It seems that this uncertainty, at least, could have been highlighted to R, which may have changed the timing of his election. An interesting question is whether the trustee would have been found liable had R been a member of the Scheme at the time he made his election. The DPO suggests some form of general duty would have arisen under Cowan v Scargill.
While employers and trustees are usually keen to avoid giving financial advice to members, the sensible approach when there are imminent major changes in the law is to provide information about those changes, without going into detail about how an individual's benefits might be affected.