Pensions Ombudsman holds employer had duty to inform member of impact of re-employment on protected pension age

We look at the recent Ombudsman determination regarding a failure to make a police officer aware of the potential tax implications of re-employment where he had a protected pension age.

18 January 2016

The Pensions Ombudsman has upheld a complaint filed by an employee of the predecessor body of the Police and Crime Commissioner of South Wales (the “Commissioner”) against the Commissioner and the scheme administrator.  The Ombudsman found that a reasonable employer owed a duty of care to its employee to inform them of the tax implications of re-employment on retirement benefits.  The employee was aggrieved at the lack of information provided regarding his re-employment and the subsequent effect on his protected pension age and additional tax and pension liabilities. The Ombudsman directed the Commissioner to pay Mr Cherry the amount due to HMRC in respect of the loss of protected pension age. 

The minimum age from which most scheme members can draw benefits increased from 50 to 55 on 6 April 2010.  A registered pension scheme and the member concerned will normally suffer adverse tax consequences if retirement benefits are put into payment before age 55.   In specific circumstances, however, an earlier “protected pension age” is allowed.

HMRC guidance stipulates that the right to a protected pension age is subject to a number of requirements including that the member must in fact have retired from their employment.  If a member’s protected pension age is over 50, the member cannot generally be re-employed by an employer that was a sponsoring employer of the scheme (or a connected employer).  There are a couple of exceptions:

  • Where there has been a break of a minimum of six months post retirement.
  • Where there has been a minimum of one month’s break post retirement, and the member’s employment is “materially different” in nature to their employment immediately before retirement.

Mr Cherry was employed as a police officer with the Commissioner and took his retirement benefits from 12 June 2011.  He was thereafter re-employed by the Commissioner within one month of receiving his benefits and in a role that was not materially different to his original position. 

This resulted in the loss of his protected pension age from the date of re-employment and his future pension payments up to the normal minimum pension age of 55 became unauthorised payments and subject to the unauthorised payments charge.

Mr Cherry complained to the Ombudsman about the lack of information offered to him by the Commissioner and the scheme administrator relating to his tax and pensions liabilities, and sought financial redress.

The Commissioner refused to acknowledge any legal duty to advise individual officers and employees on their tax and pension liabilities, stating that it was for the individual to take their own independent financial or legal advice.  It did however agree, in principle, to indemnify any individuals who were re-employed within one month of receiving their pension against tax liabilities arising from the legislative and regulatory changes to pension protection provided the employee agreed to forgo any future claims or legal action against South Wales Police.  

The Ombudsman found in favour of the member and upheld the complaint as against the Commissioner.  The Ombudsman agreed with the Commissioner that it was not obliged legally to provide advice to individual members about their tax and pension liabilities, however as a “responsible employer” it had a duty of care to provide Mr Cherry with information about the tax implications of re-employment on his retirement benefits.

The Ombudsman also held that the Commissioner’s offer to indemnify Mr Cherry was insufficient as it was not binding and left open the risk of it being withdrawn.  The Ombudsman directed the Commissioner to pay Mr Cherry the tax liability which he had paid to HMRC as a result of his loss of protected pension age (excluding any penalties for delays in the self-assessment period which would be the member’s responsibility).

Notably, this case differs from the approach taken by the Ombudsman in the Ramsey case in August 2014.   In Ramsey, the Ombudsman 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 pension benefits after that date.  However, the Ombudsman’s reasoning in Ramsey was quite case specific in points.

This is another reminder that complaints to the Ombudsman are particular to their facts, making it difficult to assess prospects at the outset.  Nevertheless, the Cherry determination highlights the importance of employers and trustees taking appropriate steps to inform members about significant legal and regulatory changes that may be relevant to their benefits, whilst making it clear that they are not providing advice on benefit options.