For defined contribution (DC) schemes, the issue is fairly straightforward. However, it is not so straightforward for members of defined benefit (DB) schemes, where there are a number of complexities to deal with. DB members look at their retirement pension based upon what they will receive and not a notional ‘pot of money’ sitting there to pay it, which HMRC calculates to be 20 times the annual pension.
From 6 April 2014, the LTA, which is the maximum amount of pension savings that benefits from tax relief over a person’s lifetime, reduced from £1.5m to £1.25m. The AA, which qualifies for tax enhancement, will also reduce from £50,000 to £40,000 in any one year.
What this means is that if a member’s accumulated pension pot is below £1.25m at retirement, they can take their pension in the normal way, including any tax-free lump sum. However, if a member’s funds are worth more than £1.25m, they may face a tax charge of 55% on anything over and above this amount.
At the moment, we don’t have any definitive statistics around how many people could be affected by these changes, but our estimates lead us to believe that many thousands of people could be on the receiving end of a hefty tax bill. These individuals range from middle to senior management in private businesses to senior fire, police, NHS, armed forces, local government workers, head teachers and civil servants earning over £100,000 a year, retiring after a full career. This doesn’t take into consideration the reduction in AA, which is likely to have a huge impact on both the private and public sector.
MyCSP is advising that pension scheme managers identify those members likely to be affected and discuss the changes with their employees. This will help them to understand what actions they need to take. Factors that should be considered during discussions with members are when they plan to retire, the amount of cash they plan to take, how their pay might increase in the future, further pensions savings from other employers, dependants’ benefits and options for flexible working.
Crucially, there was an option for members who had exceeded the £1.25m allowance to protect their money. They could have applied for ‘fixed protection 2014’, which would have retained the current LTA of £1.5m. However, they must have applied for this before 5 April 2014 but, as a result, no future pension accrual is permitted after 5 April 2014.
To help employers communicate the changes, MyCSP has launched a new service that explains the impact. It incorporates seminars, individual projections showing the potential impact of the changes in various scenarios, and one-to-one sessions with senior staff.
For more information on how MyCSP can help, please contact firstname.lastname@example.org
6 April 2014
- Annual allowance reduced from £50,000 to £40,000. Lifetime allowance reduces from £1.5m to £1.25m.
- Individual protection becomes available and members retiring will be subject to the lower lifetime allowance.
- Pension savings statements issued in respect of 2013/14 tax year.