Every employer in the UK will urgently need to review their pension provision to be prepared for when the new pensions tax legislation comes into effect in April 2011.
On 14 October 2010 the Government announced that, from April 2011, the annual allowance (AA) for tax privileged pension saving will be £50,000, marking a massive reduction from the current AA of £255,000. From April 2012 the lifetime allowance (LTA) will be £1.5 million reduced from £1.8 million.
Lee Jagger, KPMG Pensions Partner, says: “The Treasury’s chosen strategy seems to have received a warm response. There is a need for action however, and the implementation timetable is likely to create headaches for many employers. It is important that organisations implement changes now.
The good news is that an AA of £50,000 and a flat factor of 16 for valuing defined benefit pensions were much better than anticipated. With defined contribution arrangements now commonplace and good arrangements providing perhaps 15% of salary as combined employee and employer contributions, an AA of £50,000 is only likely to have an impact on those earning in excess of £300,000. Care, however, needs to be taken on how this works for schemes with matching contributions.
The £50,000 AA is likely to be more of an issue for defined benefit schemes. The Treasury did, however, announce a three-year carry-forward of unused relief against a notional AA of £50,000 for the previous three years, which will mitigate the impact of the reduced AA for moderate earners.
The announcement at the same time as a reduction in LTA to £1.5 million came as a surprise for some. Its effect, however, seems to have been to allow the Government to raise the AA to a level unlikely to hit those on moderate incomes.
It leaves a difficult decision for those with large pension savings. Do they accept a reduced lifetime allowance of £1.5 million, or opt to retain a fixed £1.8 million allowance but give up future pension provision? This is a challenging decision that many will require help with.”
In the June Budget the Government confirmed they would continue with the goal to reduce the cost of pensions tax relief by approximately £4 billion per annum. The Government, however, had concerns about the approach adopted in the Finance Act 2010 (April). In July the “Restriction of pensions tax relief: a discussion document on the alternative approach” was published by the Government. This set out the details of the proposed policy and requested further views. The feedback collected agreed that reducing existing allowances is a better and simpler way to restrict relief.
Subsequently, on 14 October the Government announced that, from April 2011, the annual allowance (AA) for tax privileged pension saving will be £50,000 and that from April 2012 the lifetime allowance (LTA) will be £1.5 million. A Written Ministerial Statement (WMS) outlining the Government’s plans was released.
The Government announced: “we anticipate that most individuals and employers will look to adapt their pension saving behaviour and remuneration terms to ensure that their pension contributions remain below the AA. However, we recognise that, for traditional DB schemes, this will be more difficult because changes in circumstances can lead to one-off spikes in pension accruals. We have sought to mitigate the impact of this through a more generous AA than we originally proposed. Further, where the pension tax charge exceeds the AA, we have proposed that unused allowance from up to the three previous years will be carried forward to offset against the excess contribution. In the interests of fairness, this will be available for DB and DC schemes. This will provide protection for the vast majority of people on moderate incomes. In the exceptional cases where this mitigation is not sufficient, we will introduce further measures to ensure that individuals will not have to pay large charges from their current income.”
UK employers urgently need to decide and implement new pension arrangements for their employees if they want to respond by April 2011. Employers will need to dedicate time and resource now in order to build new appropriate employee benefits packages.
Employers across the UK need to think about the following:
- Which employees are affected by the changes?
- Should these changes be a short-term fix or a longer-term sustainable solution?
- What needs to be communicated to which employees and when?
- What employee consultation is needed and how can this be achieved?
The key to dealing with these pension tax changes is communication with all affected employees.
What does KPMG recommend?
KPMG recommends a number of ways to communicate the pension changes within the organisation including:
- Develop a clear message and rationale for policy decisions
- Develop a communications strategy and timetable
- Identify the different audiences; experience shows that this usually falls into three groups:
- 1. employees who are immediately impacted by the changes
2. employees who are not impacted immediately but may be impacted in the future
3. employees who may be concerned but not impacted
- We have extensive experience in communicating pensions, reward and tax to achieve a successful outcome for clients
- The pensions team of KPMG in the UK has 400 pension actuaries and consultants. We can, therefore, provide extensive experience and market insight
- We draw upon support from other KPMG specialists across tax, reward and IT technology as required
- We have a track record of successfully delivering such projects, including:
- Advice to companies, groups of employees and individual employees on the evolving shape of the pensions tax regime
- Advice and delivery of extensive communication programmes for clients making changes to their employee pension proposition
- Advice to senior executives of a large number of companies regarding the impact of the last round of pension tax changes in 2006
- A core part of our corporate pensions service includes communicating and managing changes to pensions
- We are in close discussions with HM Treasury and HMRC regarding the evolving shape of the new regime. This means that we can keep you abreast of developments as they evolve so that you can respond rapidly
For further information or to discuss the implication of these changes on your organisation, please contact Lee Jagger or one of our regional contacts.
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