Former police officers who faced heavy tax bills as a result of losing their protected pension age have won an appeal against the Pensions Ombudsman.
In a judicial review earlier this month the High Court ruled in favour of five former officers from Essex Police and Avon and Somerset who had taken up civilian roles within one month of their retirement with the same employer, which led to tax penalties under the Finance Act 2004.
According to the Pensions Ombudsman decision from August 2018, Mr R – the main appellant in the case – incurred a tax liability of £671.88 when he took out the maximum lump sum from his pension.
Under the protected pension age individuals are entitled to receive a lump sum and annual payments at age 55.
But in order to avoid a tax bill there are a set of rules that must be followed. For instance individuals can’t take pension benefits between their protected pension age and age 55 and then be re-employed by the same employer within six months, or within one month if re-employed in more or less the same role.
The High Court ruled that the police authority actually knew that the appellants were being re-employed, and had told members that their lump sum would be tax free, which it stated was “highly misleading”.
As a result, the scheme administrator was liable to the police officers for the loss they suffered.
Mr Justice Morgan, who delivered the judgement, said that the “appellants did rely on the statements made to them that the lump sums would be tax-free and, further, that they believed those statements to be correct”.
He noted that if the police officers had been given the correct information, “they would have postponed the date of their re-employment to avoid the tax liability”.
He added: "The action needed to avoid the tax liability was very limited and would not have had any significant adverse consequences for the appellants and would have released them from the liability to pay substantial sums by way of tax.”
The case will now be remitted to the Pensions Ombudsman ending a 6-year legal battle.
According to Jeff Zindani, disputes litigation lawyer at Ellis Hass & Co, solicitor for the Essex officers, this has “been an utter nightmare” for the appellants, with “one of the officers facing a demand for over £100,000 from the HM Revenue & Customs and potential bankruptcy”.
He said: “There are now officers up and down the country who have been facing the same problems and this decision will now allow them to enjoy their retirement without facing losing their hard-earned pensions.”
According to David Everett, partner at LCP, this case serves as a reminder for pension schemes and administrator of warning their members with protected pension ages about potential tax bills.
He said: “Failure to do so may result in the employer, trustees or benefit administrators having to pay the tax bill.”