With the expected cut in the pension lifetime allowance to just £1m from 6 April 2016, employer pension contributions and death-in-service pay-outs could push thousands of people over the lifetime or annual pension limits, with costly tax implications.
So with just months to go, employers should urgently review staff remuneration contracts and take-on procedures as errors could potentially lead to litigation.
According to Ed Reynolds, associate director in the employee benefits team at accountants Smith & Williamson, the use of flexi-benefits packages can exacerbate the situation.
“While employees can select a personalised annual package of benefits, the process can mask the effects on their pension, leaving the individual unaware of the full implications of their choices. The widespread application of automated pension payments through pension auto-enrolment adds another layer of difficulty which the employer needs to take into account,” he explains.
Reynolds warns that these issues could leave employers exposed to the threat of litigation.
“While most people are rightly keen to build up their pension savings, the drop in the LTA to just £1m will mean many middle and higher earners, particularly those who have been investing in a pension for some years, could be caught,” he adds.
“HR teams need to be particularly alert to the position of senior staff members who may have amassed savings approaching the upcoming £1m threshold, as well as staff members who are promoted and receive a pay rise as they may get a hike in benefits.”
Recruitment teams: review take-on procedures
Similarly, recruitment teams should review their take-on procedures.
“I would recommend they now check the pension position of new joiners as a matter of routine. This is particularly relevant for new staff joining at a senior level.
“Similarly, it’s wise to ask new recruits if they have previously been members of a defined benefit scheme as they are more likely to be approaching the ceiling,” says Reynolds.
Review reward contract
In the event that benefits paid by the employer look as if they could take an individual over the lifetime or £40,000 annual allowance, their reward contract should be carefully reviewed and potentially restructured.
In some circumstances, employer pension contributions should cease, particularly if the employee is a high earner as there is a further reduction in the annual allowance for individuals earning in excess of £150,000 per year.
Death-in-service benefits, payable on death of an employee, should also be considered as they are typically added to the value of the employee’s pension pot.
This could mean the individual exceeds the lifetime allowance (LTA) on death so that the bereaved family is potentially charged tax at 55 per cent on benefits in excess of the LTA.
Given that pay-outs may be as much as x8 or even x10 of annual salary it’s important to check how this could affect individuals. It can be possible to restructure the payment of such benefits, but this may require advice.
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