What is the pensions advice exemption?

In general, pensions information and advice which employers provide to their employees – such as presentations which employees are invited to attend – are unlikely to result in a tax charge on an employee benefit. However, if an external provider has been paid by the employer to give their employees advice, this will usually result in a tax charge on the cost of the advice, as it represents an employee-related benefit.

As such, from 6th April last year, a statutory exemption was introduced by the government. Under the exemption, the cost of pensions advice up to £500 is exempt from Income Tax every tax year. This applies whether the employer provides the advice to its employees directly, or whether they pay or reimburse the cost of external pensions advice incurred by employees. If the cost of giving the advice exceeds £500 per employee, then the first £500 of the total amount is exempt from tax.

The exemption is applicable for current, former and prospective employees and applies to information or advice provided in relation to an employee’s pension arrangements or the use of their pension funds. This can include advice on general financial and tax issues linked to pension arrangements or fund, which allow the employee to make informed decisions about their retirement savings. If a person has more than one employer, and each employer provides their own pensions advice in the same tax year, the exemption applies separately to each employment.

There are two conditions which apply to the exemption. The first relates to availability and states that the pensions advice, reimbursement or payment needs to be provided through a scheme which is either open to all of an employer’s employees, or to all employees of the employer based at a specific location.

The second condition concerns age and ill health. This condition states that the advice, reimbursement or payment is provided to all employees (or all those at a specific location) who have reached the ‘minimum qualifying age’ to opt in to the employer’s registered pension scheme. The ‘minimum qualifying age’ means the relevant pension age of the employee, minus five years, so that employers are able to provide advice to employees nearing retirement. From April 2010, the normal minimum pension age has been 55, so for employers where this is the case, the minimum qualifying age would be 50.

The advice, reimbursement or payment should also be provided to all employees (or, again, all those at a specific location) who meet the ill-health condition. This means the employer can provide advice to employees preparing to retire on grounds of ill-health, as long as all employees in the same situation also have the advice made available to them. An employee meets the ‘ill-health condition’ if their employer agrees that they are – and will continue to be – incapable of carrying out their job due to physical or mental impairment, based on evidence offered by a registered medical practitioner.