HMRC Allows Use of Retirement Rule Under Sharesave Plans
10 June 2011
Summary
The default retirement age ("DRA") is due to be abolished from 1 October 2011, which could have made the retirement rule in Sharesave Plans virtually redundant. However, HM Revenue & Customs ("HMRC") has recently confirmed that it will apply a liberal interpretation to the Sharesave retirement rule so that it can still be used.
Background
Most employee share plans allow participants to be treated as "good" leavers if they retire. Since the introduction of age discrimination legislation in 2006, the retirement provisions in most employee share plans do not refer to retirement at a specific age. The abolition of DRA does not, therefore, affect the operation of most employee share plans (see our previous briefing).
However, Sharesave Plans may give rise to certain practical problems because the related legislation requires that participants must be treated as "good" leavers in the event of:
"retirement on reaching the specified age, or any other age at which [the employee] is bound to retire in accordance with the terms of [the employee's] contract of employment"
Accordingly, the abolition of the DRA means that employees may not have an age at which they are "bound to retire". This means that the retirement rule could not be used except in the unusual circumstances of an employee retiring at the "specified age" required by the legislation.
HMRC's "administrative solution" to the Sharesave Plan retirement provision
On 27 May 2011, HMRC confirmed that it will accept an "administrative solution" to the Sharesave retirement rule.
That is, HMRC agree that an individual may be "bound to retire" not only at any age specified in the employment contract signed by the employer and the employee when the employment commenced, but at any other age properly agreed between employer and employee and incorporated into the individual's employment contract.
HMRC accept that for this purpose the employment contract constitutes the totality of the terms agreed between the employer and the employee, and can include revised terms agreed from time to time between the parties in relation to retirement.
Although we await HMRC's detailed guidance on this change, we believe that this means that if a Sharesave participant and his/her employer agree at any time that he/she will retire on a certain date then, for the purposes of the Sharesave Plan, that will be the date at which the participant is "bound to retire" and so the Sharesave retirement rule will apply. This will allow Sharesave options to be exercised and no income tax charge will apply to the gain made by the participant.
HMRC say that they will be monitoring the consequences of the change to check that it is not being abused.
Practical considerations
It would be prudent for companies operating Sharesave Plans to ensure that if a retirement age is agreed with a Sharesave participant that the agreement is documented as being part of the relevant individual's employment contract.
Please contact your usual Hewitt New Bridge Street adviser if you would like to discuss the points raised in this briefing.
This update is intended to highlight issues and not be comprehensive, nor provide specific advice. Aon Hewitt Limited does not accept nor assume any responsibility for any consequences arising for any person as a result of them using or relying on the information contained in this briefing.
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