UK Pensions - Do schemes and employers have a duty to warn members about when they could lose a protected pension age?

If there are members of your scheme with a protected pension age and they choose to take their benefits before age 55, you should ensure you highlight to them the circumstances in which they could lose the protection.

Background

Members who take their pension benefits before age 55 will normally be subject to additional tax charges. However, there is an exception where a member has a protected pension age. Broadly, this will be the case where the member had an unqualified right on 5 April 2006 to take a pension or lump sum before age 55, and that right was set out in the scheme rules as they were on 10 December 2003.

A protected pension age can be lost. This will happen where, for example, the member takes their benefits and is then re-employed by the same employer. However, a protected pension age will not be lost if certain conditions are met. These include a break in employment of at least six months, or a break in employment of at least one month where the re-employment is materially different in nature to the member’s employment before retirement.

If a protected pension age is lost, any lump sum or pension payments made before age 55 will be unauthorised and taxed accordingly. The scheme may also be liable to pay a scheme sanction charge.

Do schemes and employers have a duty to warn members about when they could lose the protection?

A recent case concerned a number of police officers with protected pension ages who retired before age 55. They were re-employed within one month of retirement and as a result had to pay substantial tax charges. They claimed that the scheme administrator was in breach of its duty by failing to advise them about the tax consequences of taking up further employment.

The High Court decided that, in circumstances where the scheme administrator knew the police officers would be re-employed shortly after retirement, their statement that the lump sums would be tax free was a negligent misstatement. The scheme administrator was therefore liable to the police officers for the loss they suffered.

The Court went on to consider whether a duty of care arises even where the scheme administrator did not have specific knowledge in relation to the police officers’ re-employment. While it wasn’t necessary to reach a firm conclusion on this issue, the Court left open the possibility that the scheme administrator might have a duty to include in its standard form letters to retiring police officers “some precautionary words about re-employment within one month of retirement”.

If there are members of your scheme with a protected pension age and they choose to take their benefits before age 55, we recommend that you include in your standard form communications details of the circumstances in which they could lose the protection.

For more information, please speak to your usual Linklaters contact.