Schemes called to help high earners on tax dilemma

But they have been warned against giving generic financial advice to senior staff on their decision whether to give up future pension saving in return for retaining a larger amount of their savings before April 2012.

Schemes which provide communication to members on how their savings are affected by tax relief changes will help reduce HMRC charges on employer and employee. This should help increase the retirement income of their plan-holders.

Managers have also been called to consider adding to their auto-enrolment communication warnings about how the reform threatens high earners' tax relief, with figures affecting over 18,000 savers could be affected. 

HM Revenue & Customs (HMRC) has released the details of the lifetime allowance fixed protection, where savers can keep the £1.8m tax relief limit, if they forego future pension contributions.

Scheme members who apply for fixed protection by April 5, 2012, escape the reduced £1.5m tax relief level on their pension contributions, but are unable to build up further savings beyond that date.

Consultants have called on scheme administrators to provide external advisers all they need to help members decide on how to increase the tax efficiency of their retirement savings.

Informed choice

The tax authority has posted online the form pension savers can use to apply for fixed protection.

It requires pension scheme members to supply their personal details, answer whether they plan to take pension benefits between April 6, 2012 and July 31, 2012, and to confirm they will not benefit from other protection of their lifetime allowance.

The form must be completed by April 5, 2012, and is accompanied by explanatory notes from the HMRC website, which set out the impact of auto-enrolment.  

When contacted by members about the changes, schemes have been urged to direct them towards these materials – welcomed by the industry as straightforward and easy to complete – in making their decision.

Schemes should firstly tell members there is this new kind of protection out there which is available to them, say consultants, but the members should take their own advice on whether to register for it.

Some employers and schemes will want to offer more by way of support to their higher earners, by bringing in consultants or pushing members in the direction of independent financial advisers.

“What I have been doing is talking to senior employees on behalf of their employer, guiding them through the changes,” said Barnett Waddingham partner Bargaw Buddhdev.

A typical meeting would be a group presentation on the changes, followed by individual meetings with members, where they can discuss the totality of their various pension benefits.

Even where this independent advice is sought by the employer, there is still an important role for the scheme in providing those advisers with the information they need, for example:

1. Pensionable salary;

2. Pensionable service information;

3. Latest benefit statement;

4. Historical changes in accrual rate;

5. Detail on tiers in the pension;

6. Early retirement factors or commutation factors which could affect the allowance.

The scheme member faces a tricky dilemma around fixed protection, complicated further by the additional incentives, such as cash-in-lieu-of-pension, which employers can offer them and allow them to remain within the scheme.

“From the member’s point of view, he needs to weigh up whether the contribution he is going to get is enough to replace what he is giving up,” said Buddhdev.

A percentage cash-in-lieu-of-pension payment across the board, intended to keep contribution payments below taxable level, would be different in value for the younger employee than their colleague who is close to retirement.

HMRC has included a warning on fixed protection when it comes to auto-enrolment.

As it stands, if a holder of fixed protection is automatically enrolled into a workplace pension scheme, they will have one month to opt out of that scheme, or face losing the protection.

Platform provider AJ Bell released figures today showing 18,574 pension holders will be in this bracket when auto-enrolment comes into force from 2012.

Some schemes and employers might want to include in their auto-enrolment correspondence a note for those employees who might already have applied for fixed protection, said KPMG partner Ian Tetlow, about how it will impact them if they stay in the scheme.

“I’m sure some employers will be thinking about doing that,” he said, “[but] it depends on the kind of workforce they have.”