In this world nothing stands still, and that goes for the pensions landscape as rule changes over the years have made retirement planning ever more challenging, especially for high earners. Currently we are contending with several significant changes:
- The Tapered Annual Allowance reduces from £40,000 to as little as £4,000 which impacts individuals with ‘adjusted income’ over £240,000. This can pose a challenge as calculating ‘adjusted income’ can be complex. Meanwhile, any contributions in excess of the Annual Allowance, or Tapered Annual Allowance, incur a tax charge at the individual’s highest rate of income tax.
- The Lifetime Allowance is currently £1,073,100, and is now frozen until April 2026. A tax charge of 55% is incurred by the individual on any pension savings in excess of the Lifetime Allowance.
Predictions about changes to pensions tax relief have often proved right, given the number of rule changes since ‘pension tax simplification’ in April 2006. But with an interest rate rise, inflation increasing and an increase in National Insurance from April 2022 already announced, will more tax changes be feasible and will this further disincentivise pension saving?
Fortunately, the Autumn Budget and Spending Review 2021 steered clear of any further changes, as we already have the frozen Lifetime Allowance, as well as the Tapered Annual Allowance restricting tax relief for the very highest earners, both of which are preferred over the removal of higher rate tax relief. However, the freeze in Lifetime Allowance means that many more individuals could be caught out, given rising investments, and concern about increasing inflation creates potential for some of your people to be left with a sticky tax situation.
Therefore now is a good time – if you haven’t already done – so to think about navigating this pensions maze, and assist in educating your people so that they don’t get caught out by these complex pension rules. There is a risk that employees end up with an unexpected tax bill as a result of something provided to them as an employee benefit designed to improve their financial wellbeing. Whilst some employers see this as a personal tax issue, many employers offer some assistance in raising awareness regarding changes, as long as solutions are easy to administer and the employer is not perceived as giving financial or tax advice.
Employers can assess the impact for a business and its employees, and the options available to mitigate risk. Now is an opportune time to consider undertaking the following:
- Conduct an initial audit of your workforce to highlight which employees may be affected and what the implications could be for them;
- Consider your pay and benefits strategy, or options to limit pension contributions for employees impacted by the Tapered Annual Allowance or Lifetime Allowance. For example, this could mean re-directing pension contribution to other workplace savings to maintain a long-term savings culture, rather than offering cash in lieu;
- Consider the timing of bonuses, especially if paid near the end of the tax year, as an end of [tax] year bonus will not help individuals plan effectively. Not knowing what their Annual Allowance is until the end of the tax year, that point may be too late to avoid a tax charge. Also, for 2022, bonuses paid in April will incur more National Insurance for both the employer and employee than bonuses paid in March, for example;
- Consider a communication and engagement strategy to reach out to affected individuals, to build awareness and to help them maximise their pension tax relief and plan for any changes. Not only are face-to-face group presentations, webinars or short videos effective means of getting the high-level message across, but the provision of self-service tax calculators, modellers or individual guidance sessions can also assist in personalising the issue and enable individuals to take action or seek financial or tax advice if required;
- The Lifetime Allowance also has an impact on death in service schemes, including whether a ‘registered’ or ‘excepted’ life assurance scheme is more appropriate for your employees. Any lump sum death benefits paid from a ‘registered’ life assurance scheme would count towards an individual’s Lifetime Allowance, in addition to any lump sum death benefits from the individual’s pension schemes. However, lump sum death benefits paid from an ‘excepted’ life assurance scheme do not count towards an individual’s Lifetime Allowance.
By using engagement effectively, employers can help their people by communicating a complex pension issue. This can enable employees to make an informed decision, achieve an improved understanding of their retirement planning, and ultimately achieve a positive outcome benefiting both the individual themselves and their employer.