From the blog: The standard lifetime allowance is being reduced again, this time to £1m. That’s a reduction of 20 per cent from the current level of £1.25m and 44 per cent from the LTA’s peak level of £1.8m in April 2010.
So what does this further erosion of the LTA mean for pension schemes and trustees?
Trustees will not ordinarily know if their members are affected by the LTA, unless their pension accruals under the scheme exceed the limit.
A commonly overlooked issue is one of life assurance benefits provided through a scheme’s trust structure, written under a registered policy.
In the event of death, life assurance benefits insured and paid in this manner are assessable against the LTA.
Pension savings in excess of the LTA will be taxed at 25 per cent if they are used to provide a pension, or at 55 per cent if they are taken as a lump sum.
As before, the government has announced that a form of transitional protection will be made available for those individuals who are, or might be, affected by the reduction of the LTA. The details of this transitional protection are awaited, but we expect it to protect the value of accrued pension savings as at April 6 2016 from a tax charge, subject to a cap of the current LTA of £1.25m.
So what does this further erosion of the LTA mean for pension schemes and trustees?
Trustees will not ordinarily know if their members are affected by the LTA, unless their pension accruals under the scheme exceed the limit.
Most affected members will breach the LTA as a result of an aggregated value of their current and past pension accruals. Trustees may therefore wish to provide members with generic and member-specific information, in so far as it relates to their scheme, to assist members with their retirement planning.
Communications such as trustee newsletters and annual benefit statements present an ideal opportunity to engage with members.
But a commonly overlooked issue is one of life assurance benefits provided through a scheme’s trust structure, written under a registered policy.
A commonly overlooked issue is one of life assurance benefits provided through a scheme’s trust structure, written under a registered policy
In the event of death, life assurance benefits insured and paid in this manner are assessable against the LTA.
In addition, perils exist for protection holders before death, as participating in a registered group life assurance scheme could result in the loss of a member’s enhanced or fixed protection.
Consideration should therefore be given to the establishment of an excepted or relevant life assurance policy to address these issues.
The reduction to the LTA is more likely to be an issue for employers rather than trustees. The most likely demographic to be affected, certainly over the short term, will be higher-paid management and senior executives with material defined benefit accrual(s).
A curtailment or reduction of pension benefit accrual is likely to necessitate a renegotiation of employment contracts to reflect alternative forms of remuneration, such as higher (non-pensionable) earnings.
It will take a longer time for DC savers to see a material impact
Source: Quantum Advisory
Trustees will be limited in how they can help members as the LTA encapsulates a wider universe of pension entitlements, not just those accrued under their particular scheme.
However, the provision of generic and member-specific information will go some way to assist members in making an informed decision with regard to their future retirement planning.
Phil Farrell is a partner at Quantum Advisory
