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A recent Pensions Ombudsman Determination decided that an employer had a duty of care to provide their employee with important information regarding tax implications in respect of their retirement benefits.
Mr Cherry worked as a police officer at the predecessor body to the Police and Crime Commissioner of South Wales (the Commissioner) from 1982, and was a member of the Police Pension Scheme. He retired in June 2011 and received his retirement benefits but was re-employed less than a month later in a role similar to his original role.
He later discovered this re-employment resulted in the loss of his 'protected pension age' and his pension payments were therefore 'unauthorised payments'. This meant they were subject to a tax charge.
Mr Cherry complained to the Ombudsman that the Commission should have informed him of the tax implications of taking the new position.
Whilst the Pensions Ombudsman agreed that the Commissioner was under no legal duty to provide advice to each employee about their tax liabilities, they had a duty of care to provide important information to Mr Cherry about the tax implications of re-employment in this situation; this did not amount to giving advice.
The Ombudsman directed the Commissioner to pay the amount due to HMRC arising from the loss of protection pension age only.
The Ombudsman's determination may cause employers some concern regarding the scope of their duty of care to their employees. It is not clear how far the duty may extent, or how an employer might demonstrate that they have fulfilled it. Each decision turns on its own facts. Indeed, only last year a similar case found that the employer had no duty to warn an employee about the tax implications of electing to receive a major enhancement to his scheme benefits in view of a reduction in his annual allowance.
It is, however, clear that employers are not under a duty to give tax advice to employees and should avoid doing so.
In order to mitigate against a finding that they have breached their duty of care to an employee, employers should consider making relevant tax information available to employees, there this is appropriate. Employers could also ensure that the employee is advised to seek specialist advice before exercising rights or agreeing to significant changes, and could include a disclaimer or seek an indemnity from the employee where risks are identified.