There is nothing quite like the looming April 5th end of tax year deadline to help firms focus on the need to make employees fully understand the benefits of pension saving and the generous limits available to those who wish to increase their contributions.
It is certainly in an employer’s interests to do so because if employees are unable to retire when they actually want to it can create havoc with a company’s succession planning. Financial worries can also cause employees stress, which will impact on productivity.
The ability to receive tax-relief on pension contributions at an individual’s marginal rate frequently fails to be fully appreciated. After all, there aren’t too many other investments that effectively give you a 20% or 40% initial bonus!
Furthermore, making pension contributions to take advantage of this tax relief doesn’t have to involve incurring massive investment risk.
A whole range of multi-asset funds are now available to help those who wish to achieve a broad spread of risk, and there is nothing to stop someone who is currently nervous about equity markets from initially placing their investment in a cash fund and benefiting from the tax relief – perhaps becoming more adventurous when markets seem to have bottomed out.
Employees also often fail to appreciate the sizeable sums they are permitted to tuck away in pensions. Provided they have the earnings levels to support, they and their employer combined can place up to £40,000 tax-efficiently in a registered pension scheme in any one tax year.
There is also a ‘carry forward’ facility to take advantage of former unused balances by carrying forward unused annual allowances from up to three previous tax years – so up to £40,000 from each previous tax year – as long as there was a pension plan in place in those years.
A word of warning, however for high earners. The £40,000 annual allowance reduces by £1 for every £2 that their total annual income from all sources (and including employer pension contributions/funding) exceeds £150,000 – subject to a minimum of £10,000. If their total income excluding all pension contributions (employer and employee) isn’t over £110,000, this won’t apply.
So, if someone has total annual earnings of over £210,000 their annual pension contributions are limited to only £10,000.
Tapering can apply in any tax year from 2016/17 onwards and so can also impact on the amount of carry forward that might be available.
Many employees affected by this ’tapering’ are not aware of it. For example, we have come across quite a few who didn’t realise that income from property or overseas investments hoisted their total annual income above £150,000.
As well as helping employees appreciate whether they have an issue, a specialist adviser like Chase de Vere can come up with potential solutions as part of a review process. We may, for example, take advantage of any ability they have to carry forward contributions and recommend other tax-efficient investments as alternatives to pensions.
We can also advise on how best to communicate annual allowance limits and carry-forward facilities to employees. In particular, we recommend that employers that are considering writing to employees about these issues, do it sooner rather than later.
If the monthly pay day is right at the end of March it could leave insufficient time to carry out the necessary transactions this tax year. Giving employees a deadline in February, on the other hand, should alleviate any time pressure.
We can also advise on how to make more modest earners become more engaged with pensions and realise the need to up their regular contributions.
Whilst it is fantastic news that more than 10 million people are saving into a workplace pension through auto enrolment, we find that many are only putting away the mandatory minimum amounts in the mistaken belief that this will be enough to secure a comfortable retirement.
Whilst these minimum levels increased in April 2019 to a total of 8% for employer and employee combined, this is only 8% of qualifying earnings – between £6,136 and £50,000 for the current tax year (other minimum contribution bases can also apply).
Employers need to take some responsibility for preventing employees from developing a false sense of security, and Chase de Vere offers financial education courses specifically for the purpose, explaining how pension schemes work and how much individuals may need to pay in.
Content correct at time of writing and is intended for general information only and should not be construed as advice.