LGPS gets LTA and AA modelling tools, but tax complexity limits benefits
The Local Government Pension Scheme has introduced a check tool for members as the lifetime and annual allowances complicate life for those with large defined benefit pensions and higher salaries.
The reduction of the amount someone can save into a pension before incurring a tax charge over their lifetime to £1m from £1.25m last April is likely to mean more people with defined benefit pensions will be caught out.
It is an important part of financial planning, more schemes need to pick up on it
In addition, the current annual allowance of £40,000, with tapering to £10,000 for those earning more than £150,000 including pensions, adds complexity that could confuse higher earners.
Lorraine Bennett, pension adviser at the Local Government Association, said the online tool for LGPS members was introduced a few weeks ago. The site provides a lump sum tool, a lifetime allowance modeller and an annual allowance modeller.
Bennett noted there is now a greater need for information from members. “Funds… do feed back that they get a lot of questions on it,” she said.
Although HM Revenue & Customs has produced its own checking tool, Bennett said this “doesn’t particularly hit the spot for our members”.
This, she said, is because members are only asked to put the amount of contributions in rather than the value of their pension benefits, “which would require some knowledge on their part really beforehand”.
Bennett stressed the LGPS modellers were not intended to be comprehensive. “It’s just a quick check tool [the members] can go on and see if they’re likely to exceed the lifetime allowance,” she said.
“If they think they’re likely to exceed it then they can get further information, speak to their pension fund, [and] we’ve got a factsheet both on the lifetime allowance and the annual allowance.”
She said the annual allowance modeller in particular is relatively simple and does not currently include tapering or an option for carry forward, although there are plans to add the latter in the future.
“It was too complicated for what we wanted to do to bring in carry forward with the split tax year,” she said. “But going forward, if the annual allowance isn’t messed around with too much, we can then develop it.”
The modellers also do not include data on split tax years pre and post-retirement.
To create the tools, she said the in-house team designed the format and the calculations, and then worked with a web developer.
“It’s not really complicated, we sort of came up with the preamble, how the calculator should work, and then we sent that over in spreadsheet format,” she explained.
The process took a few weeks with a test site being created, which the team team tested repeatedly.
Schemes view tax allowance changes as a footnote
Daniel Taylor, director at administration specialist Trafalgar House, said it is unusual for pension funds to offer online modellers, and that tax allowances are not top of trustees’ priority lists.
“It’s not at the forefront of most communication plans if I’m honest, because I think some trustees see it as a personal tax matter and so don’t want to be drawn in on advising or guiding members,” he said.
Taylor said most schemes simply tell members at the end of their pension input period what their figures are, “and of course some people are caught out by that”.
He said more schemes should think about lifetime and annual allowance issues and developing modellers.
“It is an important part of financial planning, more schemes need to pick up on it,” he said.
Careful communication is required
However, Taylor cautioned that it is a complex area that relies heavily on the communication around such modellers.
As the lifetime and annual allowance changes take effect, who has to prepare and how?
When someone retires, the amount crystallised on a 'benefit crystallisation event' will show if they are breaking through the lifetime allowance of £1m, but some can avoid that by protecting a higher amount.
“Without the communications on what those figures being presented actually are, and how sophisticated it is, it could lead members to make incorrect financial decisions and future contributions,” he warned.
This concern was echoed by Bhargaw Buddhdev, partner at consultancy Barnett Waddingham, who said if someone has protection, the modeller might tell them not to make contributions, when certain circumstances could mean that it would be beneficial to give up the protection.
He also agreed that most schemes do not see it as their responsibility.
“I think most schemes are taking the view that this is a tax issue, that it affects individuals so they normally say that the company should provide this information,” he said.
Meanwhile, most companies take a position where they provide the basic information, with members then required to speak to a financial adviser, Buddhdev added.
But even where there is a modeller, he said, it can only have an effect if members use it.
“It will take time to prepare the modeller, but it still only works if the individual takes time to go through all those questions.”