The lifetime allowance (LTA) is a limit on the value of an individual’s pension savings (either a lump sum or retirement income) that can be taken without triggering an extra tax charge.
Most people will be subject to the standard LTA, which for the tax year 2018/19 is £1,030,000. It applies to the total of all the pensions an individual has, including the value of pensions they are entitled to through any defined benefit schemes they belong to. It may also include any death benefits paid as a result of employment. However, it does exclude their state pension.
Below are some key considerations for employees who have or may soon have LTA constraints, and how employers can support these higher earners.
Employees who have LTA constraints may have applied for pension protection, thus protecting (or mitigating) them from additional tax charges on their pension. However, they should be aware that some protections are usually allowable on the condition they do not make further pension contributions.
It is therefore essential that you, as an employer, are aware of any employee who has either enhanced or fixed pension protection. Why? Well, by automatically enrolling them into a pension scheme, you could be voiding their entitlement to this protection.
To help assist employers, The Pensions Regulator has a series of optional exceptions for automatic and re-enrolment duties, including cases where you are aware that an employee has protection.
Many employers offer their employees life cover through a group scheme arrangement, the majority of which are set-up as a registered group life scheme. These are legislated for tax purposes as registered occupational pension schemes. As a result, any lump sum benefits from a registered group life scheme will be aggregated with those from other registered pension schemes, and will be tested against the LTA. Therefore, any payment under such schemes increases the possibility of an employee being subject to an LTA charge.
For a member with pension protection, joining a new registered group life scheme is treated as benefit accrual and, any employees with enhanced or fixed pension protection could also potentially lose their protection by being included in a new registered group life scheme.
A potential alternative to resolve this is to create an excepted group life policy for those affected by the LTA, either currently as well as those who may be affected in the event of death. As this is subject to life insurance legislation (not pensions legislation), these life insurance benefits are not tested against the LTA. However, it is important to note there is complexity around the tax treatment of excepted group life schemes, so we would recommend you seek advice before implementing such a scheme.
We would also suggest that you – so you can plan accordingly – consider amending your HR induction process to ensure high earners/those with pension protection are asked on joining to inform the company of any protection that exists already, or may be put in place.
So far, we have focused on those employees who are aware they have LTA constraints. However, it may also be the case that some employees are completely unaware of their LTA issues, or do not realise how close they are to breaching their allowance.
For example, many individuals with defined benefit pension provision may not be aware that when they take benefits, for testing against the LTA, their pot is normally valued at 20 times the annual income taken. In addition, any additional tax-free cash lump sum entitlement will also be added to the calculation.
It is therefore important employers raise awareness of the LTA to their employees, something that can be done through providing financial education. By giving staff such an opportunity for guidance and access to resources, they can make informed decisions on their finances, leading to better financial – and overall – wellbeing.
As an employer, everything you do or say is part of an overall strategy that can help attract, motivate, retain and engage employees. Member communications regarding their pensions could help raise awareness with the potential to both educate and engage your employees with their retirement planning.
As highlighted earlier in this article, individuals may be able to apply for pension protection to help protect them against additional tax charges. However, employers could also offer alternatives such as workplace share schemes or provide employees with access to executive financial counselling (EFC), so they can utilise alternative tax-efficient savings vehicles.
EFC encompasses the sponsorship and provision of bespoke individual and personalised education, consultation and financial advice to executives and management within a company, which may also be extended to other key employees in the business.
Ultimately, EFC services provide staff with reassurance in areas that are often not easy to understand, and helps staff use the financial resources available to them most effectively to achieve their goals. It is a service highly valued by staff, with a corresponding benefit to those businesses that provide access to it.