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Ensuring employees understand pension annual allowance issues

30 August 2017

It is one of life’s little ironies that the most complex regulations governing pension contributions apply to high-earning senior executives who have the least time to get their heads around them.

But, unfortunately, the regulators will show no sympathy to those who exceed limits because they were too busy to be aware of them.

Pension planning is the responsibility of the individual but the most enlightened employers provide guidance by laying on presentations and workshops and even by offering access to one-to-one face-to-face professional financial planning advice. Chase de Vere can assist with both. 

The war for talent nowadays is so fierce that high-flying employees expect such levels of support in the workplace and, if they don’t receive them, it won’t be long before they hear of other employers that offer them.

Furthermore, should an employee fall foul of pension rules, they will probably be looking to blame anyone except themselves, and it won’t take long for their employer to spring to mind!

One of the major problems with the regulations is that they are constantly changing, so it is important that any workplace educational programme is ongoing.

For example, the pension Annual Allowance, which limits the total contributions an employee can pay into defined contribution schemes each year, is currently capped at £40,000. As recently as 2010/11 the cap was £255,000 before tumbling to only £50,000 in 2011/12.

Employees who exceed the Annual Allowance in a year won’t receive any tax relief on any contributions paid above that limit and will be faced with an Annual Allowance charge.

They may, however, be able to “carry forward” any unused allowances from the previous three tax years, to either reduce the Annual Allowance charge or eradicate it completely.

Another significant change in the regulations, which came into effect in April 2016, has been the introduction of a Tapered Annual Allowance for individuals with an annual adjusted taxable income of greater than £150,000 (and threshold income of above £110,000).

It reduces the Annual Allowance by £1 for every £2 of income above the £150,000 per annum limit – up to a maximum reduction of £30,000. Anyone earning over £210,000 will therefore have their Annual Allowance capped at £10,000.

This can be a real issue for a high earner who suddenly wants to start focusing on their retirement planning if, for example, they had previously devoted most of their earnings to financing the purchase of a valuable home. They could get a nasty shock if they suddenly find they can only contribute £10,000 a year!

Another area where employees can easily get caught out is if they exceed the Money Purchase Annual Allowance (MPAA), which was introduced in 2015 to prevent people abusing the new pension freedoms by restricting the amount they can contribute to a defined contribution scheme if they have accessed their pension saving flexibly.

Initially, if you had taken flexible benefits but wanted to continue paying into a defined contribution scheme, the MPAA restricted annual contributions to £10,000. But the government has now announced that this limit will be reducing to £4,000 per annum and will be backdated to apply from 6th April 2017.

This could cause problems for someone who, for example, has dipped into their pension fund to finance a dream holiday or buy a nice car but who then wants to start topping it up again. Unlike with the Annual Allowance, they are not allowed to carry forward any unused allowances from the previous three tax years, so £4,000 will be the absolute contribution limit.

Employers, of course, cannot be expected to know whether an employee has triggered the MPAA, just as they won’t be aware of the total value of an individual’s pension arrangements or whether they have other sources of income in addition to salary.

But they should at least be seeking to identify employees who are likely to be affected by these potentially highly complex issues and to provide them with access to suitable generic guidance or personal advice.   

If you would like to learn more about how Chase de Vere can help with providing such guidance and advice then please do not hesitate to contact Chase de Vere on 0345 300 6256 or complete this simple form and we’ll call you.