The latest from our Scottish consultancy team, based in The Capital Building on Edinburgh's St Andrew Square

 

In my last blog I spoke about the Lifetime Allowance (LTA) and how the recently announced Government freeze could impact on a much wider group of pension savers.

As I mentioned, there is an existing group, likely your senior and high earning employees, who will already have given the LTA a lot of thought when it comes to their retirement planning.

As a quick remember, the LTA is:

The maximum amount of pension savings that can be drawn from registered pension schemes without triggering an extra tax charge.

Those senior employees have probably been accounting for the LTA when deciding how much to contribute to your group pension scheme, when to stop contributing, maybe even how to invest, all in an effort to maximise their tax efficiency while avoiding that tax charge…it can be as much as 55% of the excess!

They may even use the LTA as a target of sorts, making an assumption on how much it will rise each year until their retirement, and making that their pension savings goal.

It’s a solid tax efficient plan, but as I said last time, the goalposts have now stopped moving.

Let’s assume as we did in the last blog that the LTA would have risen by an average of 2%, the UK inflation target, for the next 5 years – the length of the freeze…at least initially.

Over that time the LTA would have increased from £1,073,100 to £1,184,789…

A potential increase of £111,689 that now won’t happen…

Or at 55%, an extra tax liability of £61,429!

If you have any employees you suspect to be impacted, that is a message they might not be pleased to hear, but one that they will certainly be pleased to have heard!

We've already helped a number of clients establish a framework offering alternative options for impacted employees, and we have a range of communications ready to keep your employees informed – if we can help please get in touch.

My final thought is around employees who have final salary or defined benefit (DB) pension entitlement. These were common in the past, and remain so in some industries, along with the NHS, civil service, military and education sectors.

For this style of pension, the LTA calculation is different. It’s usually straightforward – in most cases the expected annual income from the pension multiplied by twenty, plus any additional tax-free cash lump sum – but it does catch some off guard.

For example, I happen to have a number of clients that are engineering firms. Regularly I come across ex-military personnel when I host 1-2-1 meetings, and depending on the role they have had, they can have built up significant DB pension entitlement – perhaps £30,000 a year, or £600,000 in LTA terms – meaning they have less LTA “headroom” than it might appear.

So again, we would encourage you to support those employees who may have these other pension savings, particularly as at first glance they might assume it doesn’t impact them – a common but potentially expensive misunderstanding – and yet another area we’d be more than happy to assist you with.


If you would like to speak with one of our advisers, please get in touch: viewfromthecapital@psaspire.com.

Posted by Andy Roddie

Topics: Workplace Savings, Pensions, Edinburgh

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