Employers are unprepared for the removal of the earnings cap and other pre A-day rules on 6 April 2011, according to research from Group Risk Development (Grid).
The Group Risk Employer Research study found that a third (32%) of employers are undecided about what action to take when pre A-day rules are removed, while a further 48% plan to take no action, so risk potentially huge uninsured liabilities on an employee’s death.
Only a fifth (19%) of respondents have decided on a definitive course of action.
On 6 April 2006, known as A-day, a single tax regime was introduced to replace eight previous ones.
HM Revenue and Customs (HMRC) recognised the need for transitional arrangements to allow employers to move to the new regime over a period of time, which expires on 5 April 2011 when post A-day rules will automatically apply.
Grid’s research found 10% of employers will put a salary cap back into their scheme from this April, while 9% plan to remove the earnings cap.
Benefits payable from occupational pension schemes and employer sponsored death in service arrangements under pre A-day rules are subject to the old HMRC limits, which are four-times salary for lump-sum benefits.
The earnings cap, currently notionally set at £123,600, was introduced in 1989 to set a further limit on the salary that could be used to calculate benefits.
Katharine Moxham, spokesperson for Grid, said: “Almost five years after A-Day, it is worrying such a high proportion of companies have not yet given thought to what action they will take when the transitional period ends.†
“It suggests [employers] felt like they were able to put off the decision indefinitely, but this is clearly not the case.
“It is crucial for the relevant decision makers within companies to take action before the cut-off date. Otherwise, they risk potentially crippling uninsured liabilities on an employee’s death as the earnings cap is removed and the lifetime allowance of £1.8 million generally comes into play as the amount that will be applied as the maximum lump sum payable on an employee’s death in service.†
“The potential uninsured liabilities for dependants’ death-in-service pensions are even greater as they fall outside of the lifetime allowance and thus will be completely unconstrained unless action is taken.”
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