By Dale Critchley, Workplace Policy Manager, Aviva
Individual advice and employee benefit consultancy will be needed for those employees who have fixed or enhanced LTA protection in place. These employees have been unable to contribute to their pensions. However, from 06 April they will be able to make contributions or accrue defined benefit pension entitlements without losing their protections. Employers may need to review agreements to pay additional salary in consideration of the new freedom to contribute.
When it comes to auto-enrolment, employees with LTA protections still will not need to be enrolled. If the protections remain in place, auto-enrolment regulations give employers the choice to enrol or not. The new rules will help by removing the risk of losing protections through inadvertent enrolment, which is likely to be welcomed by People and Payroll functions.
The changes also increased the Money Purchase Annual Allowance (MPAA) and Tapered Annual Allowance from £4,000 to £10,000, and the adjusted income for Tapered Annual Allowance from £240,000 to £260,000. This will provide higher earners with the opportunity to pay in at least £10,000 per year. Those who have been unable to pay in due to protected LTA will be able to use unused annual allowance for the past three years totalling £12,000. It means that in 2023/24 their minimum annual allowance will be £22,000, falling to £10,000 thereafter. Another consideration when structuring a benefit package for senior employees.
Employers may want to seek advice on communicating this to employees. Those subject to the MPAA may have opted out when the value was £4,000. The increase to £10,000 may allow them to re-join. Higher earners subject to the taper, or those with protections might need to be told about the new options open to them, too.
Employers with Defined Benefit (DB) schemes might find they receive more transfer enquiries, particularly from those who have significant benefit accrual. The LTA limited DB accrual to a pension of £53,655 per year. However, the transfer value on this amount was always likely to be considerably more than the annual allowance for Defined Contribution (DC) pensions, of £1,073,100. The potential for a hefty LTA charge was a significant barrier to transferring. With the LTA issue removed there may be renewed interest in exploring DB to DC transfer options, from those with larger transfer values especially.
Employees looking to transfer must seek regulated advice. Employers might also want to think about the value of advice to employees more generally. The LTA was viewed by many as a tax on investment growth, with those who were fearful of exceeding the limit choosing conservative investment strategies. As well as advice on contributions, senior employees in this position may also benefit from investment advice, to help them make the most of their pension pot now the upper limit has been removed.
Since the Spring Budget announcement, there have been reports that Labour will reinstate the LTA if it wins power at the next election. The threat of reinstatement of the LTA might create an imperative amongst those who have savings more than the LTA to crystallise their benefits before that happens.
The challenge for employers is to provide effective and timely communications which encourage experienced workers to stay in work. Some scheme rules allow for benefits to be taken by current employees or by active members of the scheme, but there are other schemes which have opposing rules. Employers and trustees should check that employees seeking to avoid an LTA charge can do so without needing to resign.
While removing the LTA provides increased simplification for those it benefits most, it also triggers a different set of decisions for those supporting the change. It demonstrates the increasingly important role of expert financial advice.
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