So what are the changes?
- The lifetime allowance will decrease from £1.25m to £1m
- Pension freedoms will be extended to those who have already bought an annuity
- The annual allowance will be cut for high earners from 6 April 2016. The standard £40,000 will be reduced by £1 for every £2 over £150,000 in a tax year. But income earned doesn’t just include salary; it includes other taxable income plus personal pension contributions paid gross to an occupational scheme and the value of employer contributions
- Pension input periods are changing, which may give employees extra allowance this year
One of the vital points for employers to understand is that everyone can be affected by these changes, not just high earners. For example, what happens when an employee is paid a large bonus or is made redundant, and their pay packet pushes them into the new annual allowance rules? Who is going to warn them and help them understand what to do? HR will probably be expected to take an active role in helping employees prepare for any issues that might arise.
The new pension freedoms have left employees wondering what to do with their savings when the time comes, and some may be thinking that a whole heap of cash would be just the ticket. But are they aware of the tax implications, as emergency tax codes can apply? Have they thought about what happens when the money runs out? How do employers help their employees get the retirement they want for the whole of their retirement? It’s not enough to provide employees with communications, because – let’s be honest – a lot of them don’t read what they’re sent, and some just don’t understand so they ignore it. Well we’ve all done that. Employees need to get engaged with their pensions to really understand how these changes affect them, and the most important thing they need is a plan.
In order to get a plan, you have to know what you’ve got, what you’ll need and when. To provide employees with this knowledge, they need education: face to face, straightforward and relevant education. Education isn’t designed to provide exact solutions for each and every employee, but should inform them of the issues they need to consider, what they might need in terms of professional advice, and help them understand the documentation they are being sent. This support from the business will result in happier, more prepared employees.