Only a month remains before tax changes come into effect on April 6 – changes that will hugely affect the way pensions are considered and administered.Companies have been busy in recent months making sure that each and every detail on an exhaustive list is covered, with serious ramifications for the under-prepared.
Below are some of the actions that should either have been completed or which need urgently to be addressed before April 6, 2011:
- Identify which employees will be immediately affected by the reduction in the Annual Allowance (from £255,000 to £50,000 from 2011/12) and the Lifetime Allowance (from £1.8m to £1.5m from 2012/13).
- Identify options for changes to pension arrangements to address the impact of the tax changes. For Defined Contribution schemes, this could include restricting total contributions to the Annual Allowance and re-designing contribution rate structures. For Defined Benefit schemes, this could include a change to the definition of pensionable pay.
- Consider whether to compensate employees whose future pensions savings will be restricted through alternative forms of remuneration.
- Communicate with affected employees so that they are aware of the changes. This could include written communications and/or offering affected employees access to Independent Financial Advice to help employees understand how they personally are affected.
- Confirm with the scheme administrator whether a convenient Pension Input Period (“PIP”) has been nominated for all scheme members. If no nomination has been made, they should consider making a retrospective PIP nomination by the date the Finance Bill receives Royal Assent (likely to be early July 2011) and update new joiner communications to state details of the chosen PIP.
- Communicate with those employees able to take advantage of the opportunity to make substantial Additional Voluntary Contributions (“AVCs”) before the end of the 2010/11 tax year. This may be attractive to employees anticipating a sizeable year-end bonus and the scope for this will depend on the chosen PIP and on the extent to which individuals have scope within the special annual allowance. Some employees may also have scope to make sizeable additional contributions in the 2011/12 tax year as a result of carrying forward “unused” Annual Allowance from previous years.
- Identify which employees are not immediately affected but may be affected in future by the change to the Annual Allowance and Lifetime Allowance under certain scenarios.
- Consider communicating with employees who may be affected in future so that they are aware of the changes and how they may be affected so that they can plan for the future. Some individuals who might hit the Lifetime Allowance in future years may need Independent Financial Advice on whether to apply for “Fixed Protection”.
- Be aware of the new statutory information requirements affecting employers and review processes to ensure compliance. In particular HR and/or payroll departments should review processes to ensure delivery of salary (including non-basic elements of salary that may be pensionable) and service information to pension scheme administrators so that Annual Allowance information can be supplied to affected employees within the statutory timescales and in good time for tax return deadlines.
- Discuss with trustees and pension scheme administrators the approach to be adopted for complying with the Annual Allowance information requirements and budget for additional associated costs. Consider whether the employer needs to provide any further assistance to employees completing tax returns.
- Discuss with trustees and scheme administrators how to assist employees considering electing for the “Scheme Pays” route to meet Annual Allowance charges to enable them to make the necessary decisions and elect within the strict HMRC timescales.
- Identify whether you have any foreign nationals in the UK or UK nationals in receipt of UK earnings on overseas contracts. Remuneration packages for these individuals may need to be considered separately from other employees. Consider taking specialist advice to plan an effective strategy for these individuals.
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