The changes to pensions benefits announced in the 2015 Summer budget, which affect the amount of tax paid by higher earners, come into effect in April.
Here we outline the key features of the tapered annual allowance (TAA) and recommend a course of action for individuals, their financial advisers and employers to minimise the impact.
What is TAA?
"Whether you fall under the category of employer, high earner, or financial advisor the message is the same: act now before the new rules come into play in April 2016."
The TAA is designed to limit the amount of tax relief those with income of more than £150,000 may have on their pension contributions. Yet there are wider consequences for many more employees who may never get near this threshold.
This is because the taper is assessed against what is being called ‘adjusted income’. This takes into account more than just salary, covering all taxable income, including savings interest, share dividends and even income from property rental on top of your workplace pension contributions.
So it is not only those with salaries in excess of £150,000 or £200,000 who stand to be affected either now, or in the future. Just how many will be drawn within the tapered annual allowance is unclear. The HMRC’s best guess was 300,000 individuals when the changes were first announced, but it is fair to say that no-one is quite sure.
Employees – in particular, executives – may find themselves facing a large tax bill and it is their employer they will seek explanation and assistance from.
It is therefore essential for businesses to develop a planned response to the changes in annual (AA) and lifetime allowances (LTA) if they are to help employees manage their liability, not to mention avoid any unnecessary reputational risk from being seen to do too little.
Whether you fall under the category of employer, high earner, or financial advisor the message is the same: act now before the new rules come into play in April 2016.
Don’t wait for your employer to tell you what to do, as they won’t be the one footing the bill should the allowance be breached.
- find out how you might be affected by the TAA.
- at the same time, determine how close you might be to the LTA.
- make use of any unused allowances from the last three tax years.
- consider transferring assets generating income into a spouse’s or partner’s name to reduce your adjusted income.
- if you have extensive final salary pensions, consider living off those and passing on any defined contribution (DC) savings to a beneficiary - the reforms introduced in April 2015 allow you to do this.
- don’t give up on pensions altogether - if you are in a generous final salary scheme, it may still be beneficial to pay the tax on the excess earnings and draw benefits in the future.
- find a financial adviser who specialises in pensions matters to help you navigate this difficult channel - if you are near or under the taper, it could save you a fortune in the long run.
- don’t leave it too late - there is likely to be a last minute dash for help and there are only so many financial advisers to go around.
Employers have no legal obligation to inform their staff of the changes, but as pensions are contractual benefits, few would consider leaving them to their own devices. That may not suit the organisational culture, but it certainly raises the spectre of reputational risk.
So, employers should:
- assess: how many of your employees might be affected? Consider the alternatives to pension contributions – though this won’t be an option in some public sector groups – and how you will implement them.
- communicate: even if you select an alternative to pensions, such as cash, communication is the most important – and effective – means of mitigating the risks TAA throws up. High earners must be a priority, but then consider how to segment your workers with regards to others likely to be affected.
- engage: set your strategy, from simple written communications, through webinars, microsites and even presentations. Some employers may consider the option of offering one-on-one guidance sessions with professionals.
- educate: this may not be a consideration, but providing employees with enough information to make an informed choice may increase their appreciation of the business and the benefits it provides them with.
There are opportunities to help both employers and individual investors through the complexity of TAA. Aside from individual business, it may allow you to refresh corporate relationships with businesses struggling with their journey towards the adoption of automatic enrolment.
- how are your existing clients likely to be affected by TAA?
- inform clients of the changes and how their private wealth and workplace pension will interact with these new rules.
- ask clients if they have been advised of the changes by their employer – every one that hasn’t is a lead.
- advise clients to use up allowances to maximise their contributions before the door closes on the ability to carry forward.
- after that, clients will need alternatives, because their employers may not offer anything, or simply cash - preparing a suite of products or a solution for managing that wealth will be welcomed.
- get ready for the rush – March may be even busier than normal and you can expect referrals from clients you have already assisted.