The Pensions Ombudsman has sided with technology company Honeywell after a member of one of its pension schemes complained it had caused him to pay more tax than necessary.
The case highlights the need for members to ensure they fully understand their scheme's obligations, experts said.
The individual – referred to as Mr N in the ombudsman’s determination – was employed by Honeywell’s predecessor company and a member of the GKN Westland Final Salary Pension Scheme. When this closed to accrual in 1998 he joined the Allied Signal UK Retirement and Share Ownership Plan.
The risk here is unfunded liabilities that need to be met, or – as was the case here – an unhappy member getting a tax charge that they don’t think is fair
Anne-Marie Winton, Arc Pensions Law
In 1998, the company promised to “provide for every employee who retires at age 60 or later, the greater of the benefits provided by the Allied Signal Scheme or the benefits of your current GKN Scheme”; this was known as the “special arrangement”.
This promise was to be paid through an extra contribution to the Allied Signal Scheme, transfer of the accumulated fund into the Allied Signal Scheme or by an extra pension relating to the shortfall being paid through company payroll.
The introduction of the Finance Act 2004 introduced a tax charge on payments exceeding the annual allowance. Honeywell sought a dispensation from HM Revenue & Customs but was unsuccessful.
When Mr N retired in May 2013, he requested his special arrangement benefits be paid through payroll.
However, Honeywell opted to transfer his accumulated fund to begin payment because it would entitle him to a higher amount of tax-free cash, and prevented him from becoming an unsecured creditor should the company go insolvent, according to the ombudsman’s determination document.
Mr N complained the company’s method of paying his pension led to him paying more income tax than was necessary.
Understanding change
A spokesperson for Honeywell said in a statement: “Because laws regarding tax and pension change, we encourage employees to seek regular counsel from resources inside and outside the company to ensure they fully understand the tax obligations relating to their pensions benefits and the options available to them as they plan for retirement.”
Anne-Marie Winton, partner at law firm Arc Pensions Law, said: “The risk here is unfunded liabilities that need to be met, or – as was the case here – an unhappy member getting a tax charge that they don’t think is fair.”
She added: “Key in this decision was the finding that the scheme sponsor was under no obligation to provide the top-up benefit in the most tax-efficient way for the member – but this could depend on the precise terms of the promise made (assuming that it was written down in that level of detail).”
Promises to members could also have been made by management no longer associated with the company, she added.
While employers are required to consult before closing a scheme, there is little they can do to ensure every affected member fully understands all aspects of the change.
Ruth Bamforth, senior associate at law firm Walker Morris, said: “There’s not a requirement on the employer to make sure every recipient of the consultation understands what they’re being told. You just make sure the materials are clear.”
