To compensate for the 6 April 2016 pension tax changes, or not, as taxes are taxes
Whatever announcements are made by the Chancellor in next month’s budget, it’s likely that many employers will still be grappling with the pension tax changes arising from last year’s July budget and working out what to action to take, if any, over their “high earners”. These are employees and directors who are affected by the new tapering annual allowance restrictions on pensions tax relief for those with an income from any source of over £150,000 a year and/or the reduced lifetime allowance of £1m rather than £1.25m. The tapering works so that anyone with an income of over £150,000 has their annual allowance reduced by £1 for every £2 of income over £150,000. The maximum reduction is £30,000 that applies to individuals with an income of over £210,000 and this results in those individuals having an annual allowance of £10,000.
Many employers have some awareness of these changes. However because the issue is so dependent on the level of an individual’s own income and their pension savings, employers tend to fall into two camps – those that regard this as the individual’s problem to resolve and those that want to put in place some special arrangements for their affected people. This may include paying for them to have financial advice, helping to take them out of future pension accrual and giving them an alternative without using this as a lever to encourage the other pension scheme members, not affected, from staying in the scheme and earning further pension.
While everything to do with this issue is complicated, here are some key employer action points.
Dos and don’ts for employers
- Do issue a general announcement to all your employees about the April 2016 pension tax changes if you haven’t already done so. It should ask individuals who think they will be affected by the changes to come forward. This would help to show that the employer and any trustees are complying with the spirit of a recent Pensions Ombudsman’s determination that suggests employers should provide information to employees about the possible tax adverse consequences as regards their pension arrangements.
- Don’t however be seen to initiate the idea of pension changes for the affected employees. Instead let them know that you are open to receive requests to a change in their pension arrangements. With some employers this will amount to more or less the same thing, where the employer has already been working closely with these key individuals about their pension arrangements.
- Do get any announcement that’s to be sent to all employees about the tax changes professionally reviewed before it’s sent. This is to make sure it doesn’t cause any unintended problems, for example, the employer being seen to be initiating some sort of unintended “consultation” about the scheme.
- Do be wary of offering anything other than extra cash as an alternative to pension contributions ie an easily comparable salary increase in lieu of the pension contributions because of the complications which offering other types of compensation, like share options could cause.
- Even then still be wary. Employers don’t need to offer all employees the alternative pension deal. There is no requirement under the Pensions Disclosure Regulations 2013, or otherwise to inform the all employees more fully of the employer’s proposed actions for the particular employees who are affected by the pension tax changes. However, employers should consider whether by not opening the offer to all its employees, it runs a risk of its actions causing direct and also indirect discrimination, eg. against women or younger employees, if the affected pool of employees are male or the employer’s longer serving, higher paid employees. An employer will want to be sure its actions are capable of being objectively justified which should be possible generally given the rationale for the changes are the new tax rules. However this approach should be legally analysed each time to make sure that it is watertight.
- Do alter the affected individual’s contract of employment to reflect the change in pension arrangements. This will have to be quite carefully worded as we are still in the rather odd position that legally, with auto-enrolment, employers shouldn’t be seen to be inducing an employee to opt out of their automatic enrolment pension arrangements. Legal advice should be taken on this as employers shouldn’t be seen to be driving the issue too much.
- Do check your scheme’s governing documentation. If opting out of active membership of the scheme before a particular date is the solution, are there any rules which would cause a problem with what is being proposed like notice periods for opting out of active membership of the scheme that have to be complied with and is there any flexibility over this?
- Do review the current subsidiary benefits such as life assurance arrangements for these individuals to see how they would be affected on the change in membership status. It is likely that some tweaks will be necessary. Possibly now is the time to look at introducing an excepted life assurance policy. These arrangements are complex from the tax perspective and also in terms of how they are documented so, legal input on this is highly advisable.
- Do check the proposed new arrangements won’t have unintended consequences for the scheme like unintentionally triggering its winding up or any other unforeseen actions like this.
- Do encourage employees to take specialist advice on how best to protect their lifetime allowance as this is now very complicated.
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