The Pensions Ombudsman has recently decided that the employer of a member with a “protected pension age” for the purposes of the pensions tax regime should have provided information to that member about the possible adverse tax consequences of becoming re-employed after starting to receive his pension.
The decision related to a complaint brought against a Police & Crime Commissioner in relation to the Police Pension Scheme, but is likely to be significant for all employers participating in schemes where any members have the right to take benefits earlier than the current normal minimum pension age of 55.
Before 6 April 2010, the minimum age at which pension benefits under a registered pension scheme could normally be put into payment was 50. When this age was raised to 55, the concept of a “protected pension age” was introduced, in order to avoid detriment to a member whose scheme’s rules already gave him an absolute right to take benefits at an age earlier than 55.
Members with a protected pension age can still take benefits before age 55, provided that certain conditions are met. Benefits paid in such circumstances will be treated as an authorised payment for the purposes of the pensions tax rules.
One of the key conditions in relation to protected pension ages relates to re-employment after taking benefits. Although the practice of “flexible retirement” – ie. starting to receive a pension whilst still remaining in employment – has generally been permitted under tax rules since 6 April 2006, a member who has a protected pension age of 50 or more and who takes benefits before age 55 does not have the same freedom.
In broad terms, a member who starts to draw benefits in those circumstances cannot become re-employed with the same (or a connected) employer unless one of two conditions is met:
- There has been at least a six-month break in employment.
- There has been at least a one-month break in employment and either the new employment is “materially different” from the previous employment or the scheme rules provide for abatement – that is, reduction of the member’s pension to reflect his earnings.
If neither condition is met, the member will lose his protected pension age, and all pension benefits paid to him from the date of retirement until the age of 55 will be treated as unauthorised payments. As a result, the member will become liable for substantial tax charges (at least 40% of the value of the payments made). Similar (though less restrictive) rules apply where a member has a protected pension age lower than 50.
In the case before the Pensions Ombudsman, the complainant (Mr Cherry) was employed as a police officer in the South Wales force from 1982 until 12 June 2011, when he retired and took benefits, relying on his protected pension age. He was then re-employed by the same employer (now the Police & Crime Commissioner for South Wales) on 23 June 2011, meaning that he could not show the necessary one-month break in employment.
When Mr Cherry became aware that his re-employment had resulted in the loss of his protected pension age, he brought a complaint of maladministration to the Pensions Ombudsman, arguing that the PCC, as his employer, should have alerted him to the adverse tax implications of re-employment within one month of retirement.
The PCC acknowledged that it had been made aware of the special rules around protected pension ages and re-employment in a Home Office circular issued in 2006, but maintained that it had no obligation to advise Mr Cherry about his tax position. However, the PCC also confirmed in correspondence with the Ombudsman that “A process is now in place to ensure that individuals are not re-employed until a period of at least a month has elapsed. This is a step a responsible employer, who has had the tax change brought to its attention, would inevitably take to assist its employees”, and offered to indemnify Mr Cherry against the resultant tax liabilities, though without conceding liability.
The Ombudsman’s conclusions
In a succinct determination, the Ombudsman concluded that the PCC should have provided Mr Cherry with the information already in its possession (in the form of the Home Office circular) regarding the tax implications of re-employment within one month of retirement, and that it had a duty of care towards him in this respect.
The Ombudsman agreed that an employer does not have a legal obligation to advise its employees on their tax and pension liabilities; however, providing the information from the Home Office circular was not the same as advising Mr Cherry.
As regards remedy, the Ombudsman ordered that the PCC should pay Mr Cherry the amount of the tax liabilities which were a direct consequence of the loss of his protected pension age, once those liabilities had been established by HMRC through the self-assessment process. However, any penalties or interest arising as a result of delays in the self-assessment process would not be payable by the PCC.
The outcome here is a little difficult to reconcile with some earlier determinations, such as the decision of the then Deputy Pension Ombudsman in Ramsey, in which it was held that the employer, trustee and administrators of a defined benefit scheme were not under any legal obligation to inform a member of the adverse tax consequences of exercising a particular option under the scheme’s rules after the reduction of the annual allowance in April 2011.
However, in view of the approach adopted by the PCC here, and in particular its admission that a responsible employer would “inevitably” seek to protect its employees from the risk of losing their protected pension age through re-employment, it is ultimately unsurprising that the Ombudsman reached the conclusions which he did.
Whilst each case will turn on its own merits, in light of the unqualified statements made by the Ombudsman regarding the duties owed by a “responsible employer”, employers would be well-advised to ensure that information on important tax changes is provided to employees who are or may be affected by them. An obvious example coming up in the near future is the introduction of the tapered annual allowance for high earners, and the reduction of the lifetime allowance to £1m (with associated transitional protections), both of which take effect from 6 April this year.
Similarly, trustees need to take steps to alert all members to relevant tax developments, if they are to avoid future complaints of maladministration by members who find out about such changes the hard way.