On 6 April 2016 changes to both the annual and lifetime pensions allowance limits will come into effect. From this date, the annual allowance will be gradually reduced from £40,000 to £10,000 for those earning between £150,000 and £210,000 a year, while the lifetime allowance will reduce from £1.25 million to £1 million.
- How can employers identify which employees are likely to be affected by the changes?
Typically, the people that will be affected will be those on higher salaries. However, somebody may have come in from another organisation with a large pension that they have built up over many years so might be close to hitting the limits, whereas somebody with a large salary might not have saved much in their pension yet at that stage in their career.
Employers should know the people that are more likely to have an issue. Targeting communications leads to much better take up of people taking action so the more targeted employers can be to zone in on those that are likely to be affected, the better. However, they also need some sort of broadbrush messaging in case they have missed anyone.
2. What do employers need to do to ensure their pension scheme is ready for the changes?
The first thing to do is to make sure that every employee has access to information that things are changing.
The second thing, especially where employers have quite a few high-paid individuals, is to help these individuals understand the implications of the changes and determine if they are affected or not. It is not just an elite few now that are affected by lifetime and the annual allowance; many more senior management will be depending on the organisation.
What employers do not want come 6 April is that somebody does not realise the implications, makes a payment into their pension and breaches the tax rules. Or that they realise after 6 April that they wish they had done something in the build up to this.
3. What are the implications of not taking action?
It will often be some of the most highly valued individuals to an organisation that are affected because they are likely to be the ones with larger salaries. The worst scenario for a large employer would be that it does not manage to get across the messages to these individuals and they become disengaged as a result.
There is a direct link between the people that will be affected by this change in legislation and the ones that the employer most cares about rewarding and retaining.
4. What alternatives should employers offer to staff affected by the changes?
That comes down to the organisation and its reward strategy. If it would have paid some money into a pension for an individual and they have reached their limit, it could pay the money as extra salary or it could look to pay money into other products.
With other products, there are certain complications to consider. For example, if they pay money into an individual savings account (Isa) on behalf of an individual, they need to be sure that the individual has not met their Isa limit already.
Also, employers might want to wait to see what comes out of the government’s review of tax relief on pensions, which may have implications for their reward strategy and possibly affect the same group of people within their workforce.
Some employers have wanted to make sure that people are aware of the change for 6 April, then really take stock and see what the government comes back with on the review.
5. What opportunities do the changes present for employers?
With all pensions and benefits, there are two types of organisations. There are those that see their pensions and benefits as a profit centre and those that see them as a cost centre.
If they see them as a cost centre, they are just interested in compliance. They are not really seen as an investment and are seen as a cost.
Those that see them as a profit centre are using these pensions and benefits to recruit, retain, reward and, ultimately, retire the best people that they can. So employers in that category are likely to see any change as an opportunity to demonstrate to employees that they are a good employer to work for.
6. What pitfalls must employers avoid?
There is always a fine line to ensure they do not stray into giving advice. That is the hardest one for organisations and trustees in many situations to make sure they do not cross while still being helpful for individuals who want support to understand their options. That is where providers have a role to play because they are used to dealing with that on a day-to-day basis.
Alan Ritchie is head of employer and trustee proposition at Standard Life