Need to know:
- The abolition of the pensions lifetime allowance in April will require an overhaul of employee communications, and a revaluation of pension scheme design and administration, including opportunities to simplify the scheme and reduce the cost of running it.
- Employers will need to review policies for employees who previously opted out of the pension scheme because they may have been close to the lifetime allowance.
- Two new limits will be introduced in April to control tax relief on pension lump sums.
The lifetime allowance (LTA) is the total value an individual can build up in their combined pension savings without incurring a tax charge: for most people in the tax year 2023/24 this is £1,073,100. However, in its March 2023 Budget, the government decided to abolish the LTA, in part because NHS consultants have been leaving their roles in droves to avoid the tax.
From April 2023, the LTA charge was removed and pension benefits have been taxed as income with no additional penalty since then, but the formal abolition of the LTA required a raft of new legislation which is now complete, so this will take place from April 2024. Simple as it sounds, this final act of abolishing the allowance has wide-ranging ramifications for employers.
Jonathan Balkwill, a partner at LCP, says: “Many pension scheme members will see no change to their benefits or to the tax they pay as a result of the changes.
“However, those with high pension benefits may be impacted and will have additional decisions to make and there is a huge amount of work for pension providers to comply with the new rules. There are a number of actions employers need to consider urgently, and a very short window to take action to avoid any significant surprises on 6 April.”
Manage opt outs
Most obviously, employers will need to review their policies for employees who opted out of the pension scheme on concern their benefits were sufficiently large to be hit by the LTA penalty. Some employees may have been offered payments in lieu of pension contributions, for example.
Clare Moffat, pensions expert at Royal London, says: “Employees who previously opted out of the [workplace] pension because they were at, or close to, the lifetime allowance now might want to opt back in to receive the benefit of the employer contribution and tax relief. Some employers offered a cash benefit instead of a pension contribution. Employers need to think about whether this was a contractual change and if they want to offer a reduction in pay and membership of the pension scheme before the next opt-in date.”
Retirement packs, handbooks and other employee communications will need to be updated, and additional support such as seminars could be offered to senior staff and scheme members looking to draw their benefits close to 6 April.
Accrue additional benefits
Pension scheme members with valid enhanced or fixed protection will now be able to accrue additional pension benefits, join new arrangements or transfer without losing this protection.
Employers will need to support their workforces, “to help employees understand the implications of the changes, in particular, making sure impacted employees are aware of the fixed and individual protection (2016) deadline in April 2025 and, if they have already taken some retirement benefits, consider whether they should apply for a transitional tax-free certificate,” says Rachel Haggarty, head of [defined contribution] DC corporate proposition at Hymans Robertson.
Pension scheme members with enhanced or fixed protection will also be able to accrue new benefits arising from guaranteed minimum pension (GMP) conversion. Employers should consider this opportunity as GMP conversion exercises are attractive to schemes where the yearly administration costs of other methods of GMP equalisation are disproportionate.
New pension limits
While the lifetime allowance will be removed, two new limits will be introduced in April to control tax relief on pension lump sums, with a cumulative limit of £268,275, i.e. 25% of the £1,073,100, which was the former LTA. There is also a limit of £1,073,100 on the total amount of the tax-free part of lump sums and lump sum death benefits payable in respect of a member.
Many employers have been offering excepted group life policies to higher earners to avoid breaching the allowance, because these schemes fall under life insurance legislation rather than pension legislation, and the lump sum death-in-service benefits were not included in LTA calculations. “The same logic still applies from 6 April 2024, as benefits from both of these types of policy wouldn’t form part of the new lump sum and death benefit allowance,” says Moffat. “It’s worth employers checking how their plans have been set up.”