Such is the speed of changes to the UK’s current pension rules and regulations, it feels like if you blink and you’ll probably miss something.
In fact, as we saw last week, the Government appeared to do a U-turn on pensions tax relief, so as well as keeping abreast of changes, there are non-changes to be aware of too.
Despite being canned in the short term, a brief summary of the pensions tax relief issue will be of use because it is widely expected to rear its head at a later date.
Tax relief shake up
In short, it seemed likely that the Chancellor was going to unveil seismic changes to the existing system of pensions tax reliefs in his 2016 Budget. This was following a period of consultation which was announced back in July 2015. The options on the table included introducing a flat rate of tax relief for all savers, or even a possible removal of initial incentives altogether.
Whilst these pension changes have been put on hold (or postponed, depending on how cynical you are about other political priorities circling like the Brexit vote), those savers who might be impacted by this change need to be made aware of the issue as it looks likely the Chancellor will return to this topic in the future. Anyone saving for their retirement will need to make an informed decision and plan effectively, and perhaps bring forward any pension contributions to be invested before any restrictions of tax relief are applied.
Enough of the non-changes, what about what’s actually in the pipeline…
The imminent changes to pensions tax rules for the Annual Allowance and the Lifetime Allowance come into force on 6 April. The latest thinking here is that there may not be any further dramatic pensions rules shake-up in the Chancellor’s Budget but these changes (already announced) still need to be dealt with as a matter of urgency. Businesses are seeking to understand how the changes will affect their business and their employees, and how best to communicate such changes.
Changes to the pension allowances
Anyone whose total taxable income from all sources is over £110,000 will need to consider whether they will be affected by a reduction in the Annual Allowance. For those whose 'Adjusted Income' is above £150,000 they will suffer a reduction in their Annual Allowance. This reduction could be as much as 75% of the full Annual Allowance.
The Lifetime Allowance is being reduced to £1m; a figure that may still appear out of the reach of the majority. However, a high earner with moderate pension savings and at least 3 times death-in-service benefits will be at risk of exceeding the new limit. Individuals will have some protection options to consider, and they may need to take action before 6th April 2016.
While there are some relatively straightforward decisions to be made for some, such as maximising tax allowances and increasing pension contributions if appropriate; other decisions are more complicated around whether previous years’ pension contribution allowances have been maximised and whether utilising the ‘fixed and/or individual protections’ available are appropriate. The most important point is that such decisions need to be made and, most importantly for some, implemented before the end of this tax year.
For employers, the first step is to identify who the new rules may affect, and this includes:
- An employee whose total pension savings are close to, or in excess of, £1m. Such individuals will need to make a decision, very quickly, regarding whether or not to continue contributing to their pension. Some protections are available but any decision to stop contributing and use the new fixed protection must be effective before 6 April in order to benefit.
- Employees whose taxable income (from all sources) exceeds £110,000 could be affected by tapering of the Annual Allowance.
- There are tax consequences if the Annual and/or Lifetime Allowances are exceeded by any individual.
- High-earners are most likely to be affected, but it isn’t always evident which employees will be affected as all pension pots are taken into account for tax calculations and if an employee has been saving over a long period of time and has a number of pensions, they may well be affected too.
Tax is a subject that causes many employers and employees alike to bury their head in the sand but the implications are far reaching and complicated. If ever there was a time to seek expert advice it is now. Employers often need help in addressing the salient issues in order to find the solution that works for their business and their people.
About Nick Allen
Nick Allen is head of pensions consultancy at Jelf Employee Benefits. Appointed in 2014, Nick joined the company from The Oval Group where he was the head of workplace benefits, and before that spent 18 years at Mercer.
Nick’s opinion have been gleaned from over 30s years working at the coal face in supporting employers in setting up and managing their workplace savings plans.