The Unintended Consequences of the Pension Freedoms

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As an employer, you could be forgiven for not being overly interested in what your staff are doing outside of your workplace pension scheme. However, some HR managers are discovering that when their staff take benefits outside of their scheme there are some significant unintended consequences and by then it’s too late to help them.

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Firstly, if a pension fund is taken entirely as cash, the taxable element is regarded as ‘income’ and is included in any assessment made for means tested State Benefits. This is particularly topical currently, with the government considering reductions to tax credits.

The second issue is if members of your workplace pension scheme take their benefits in this way, their annual allowance should be reduced to £10,000. The annual allowance is the level of contributions (both employer and employee) that qualifies for full tax relief each year. However, even when contributions are considerably below £10,000, individuals will need to notify the provider of their workplace pension plan within 91 days of taking benefits. If they fail to do this, HMRC can impose an on the spot fine of £300 and increase this by £60 per day until notification have been received.

I have spoken to HR managers who have been approached by some very distressed staff for help as in some cases, the combination of reduced tax credits and fines could eat up a large proportion of the cash received. Accusations of ‘why didn’t you tell me this could happen?’ and ‘what can you do to help?’ are becoming more common and unfortunately by this stage there is nothing they can do.

However, many HR managers are using this as an opportunity to remind their staff on the benefits of saving in the workplace pension whilst providing timely warnings to those tempted to take benefits outside of this. Newsletters, presentations and small workshops have all proven to be very popular among our clients and raised the profile of schemes resulting in  increased contributions and importantly higher appreciation and understanding of the benefits provided.

Where personal contributions are paid through salary sacrifice, this also results in an increased saving by the employer in National Insurance, and that can contribute to the cost of the additional communications, so good news all round. No HR manager wants to have to tell a tearful employee that there is nothing they can do to change the loss of benefits or the tax fine received but a timely warning can significantly reduce the risk of this happening.

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