Tapered annual allowance: how can you help?
Earlier this year, the government announced provisions for reducing the annual pension allowance for individuals earning over £150,000. These high earners will see their annual allowance fall, via a sliding scale. For example, individuals earning £210,000 a year will only be able to put £10,000 into their pension pot per year before they incur tax penalties.
One of the biggest potential challenges of the change is that each individual will struggle to know precisely what their annual allowance is, given that their total annual earnings may not be known until the end of the year when their pension contributions have long gone into their arrangement. In addition, further confusion could be caused as the administrator of the pension scheme will only know about the contributions for their specific pension plan. As is the case now, administrators have little knowledge of additional income or pension contributions made elsewhere.
The announcements have been met with confusion, with many commentators describing them as a headache for everyone involved. Individuals in particular will be looking to their employers and pensions schemes for help navigating their way through the changes. Employers will need to take time to consider whether their schemes have the right processes and member options in place so individuals can cope with the changes.
So, as an employer, what precisely can you be doing for affected individuals? Well, you have a few different options:
- Do nothing: ultimately, it is the individual’s issue and so the responsibility lies with them. You are not obliged to offer alternatives or restrict payments to the pension arrangement and some individuals may still see merit in saving into a pension even with reduced tax-efficiency. However, having said that, this reaction could have a considerable impact on the financial position of your high-earning employees and may give rise to future complaints from these members.
- Limit contributions to the plan: this can help members avoid tax inefficient savings. We see a range of measures being considered by schemes including setting a contribution limit at £10,000 and only increasing on the members’ request as well as scenarios in which members must elect contribution rate limits.
- Give cash in lieu of pensions: although this is beneficial to your employees because they are being compensated for the change and may appreciate the immediate access this brings, you will have no guarantee on how this will be used in the long-term. Your employees could decide to spend the additional cash straightaway meaning that your alternative will have no or even a detrimental impact on their retirement savings.
- Divert contributions to a flexible benefits arrangement so members can select alternatives such as corporate ISAs: this will allow you to keep a distinct separation between salary and benefits in the reward package and could also encourage employees to think twice before withdrawing it as cash.
- Offer a combination of the above and give your employees the choice: we are increasingly seeing pensions becoming more flexible and this could be a good way of giving your employees additional freedoms. However, the flip side is that your processes could become much more complicated, increasing costs and governance considerably.
It is clear that the annual allowance changes complicate the pension process for a small section of your workforce. Employers will need to dedicate some time and resource to the issue to help to ensure their high earners maximise the potential of their pensions. A pension scheme that works well for the majority is essential, however, we expect few employers will be forgetting about the individual situations of their high earners and will be doing all they can to ensure the reward package works for them too.