Although we won’t know for certain until after this morning’s Budget speech has been delivered, leaked reports yesterday suggested that the Pensions Lifetime Allowance for savings is set to decrease once again.
For those not immediately familiar with the Lifetime Allowance (LA), it is described by The Pensions Advisory Service (via a link freely available on the internet) as follows:
“The Lifetime Allowance is the maximum amount of tax relieved pension savings you can build up over your lifetime. It is set by government and reviewed regularly. It is set at a high level, so it is unlikely that you will be affected by it.”
The above is a good summary. Exceed the LA with pension savings and you are looking at some serious tax charges. Yet – as the above paragraph suggests – the LA is set at a high level so most ordinary savers won’t be impacted. Or is it?
When first introduced the LA was set at £1.5m, and this increased to a high of £1.8m. Since when it has been slashed time and time again. If yesterday’s reports are correct, then it will shortly sit at only £1m.
Will The Chancellor undertake such a move? It’s difficult to see why he wouldn’t, given that it’s a nice little earner for HM Treasury. Not only that, but it’s a policy that is armour-plated for Mr Osborne. This move has already been championed by his political opponents (Labour and the Lib Dems), so it will be difficult for them to attack with any credibility. It’s also a policy that will be perceived as only of detriment to the higher paid (so no potential banana skins in being portrayed as pandering to the rich).
So let’s assume that this decrease will happen, either announced today, or shortly after any new Government is formed. Given this, what are the practical implications for employers and their employees?
Firstly, this new lower threshold will potentially catch many more employees than previously – potentially including some on fairly modest salaries. Examples would include employees who have saved for a significant period of time in a good quality Defined Benefits scheme (where the actual assessed value of the savings is often much higher than that perceived by the employee), and savers who achieve better than expected returns on their pension investments.
A second, and less well known, issue is around company sponsored Group Life Assurance for employees. Most such schemes will provide a lump sum payment on death of the employee – and this often counts towards the Lifetime Allowance limit. With most Group Life schemes paying a significant multiple of salary as a lump sum payment, this can easily take the deceased savings above the LA threshold, potentially leaving a nasty tax bill to be settled at a difficult time for the dependants of the employee.
So there are perhaps some issues for a larger number of the workforce than has been generally perceived. Employers may well want to better communicate these concerns, and also provide some options to mitigate these issues. Indeed, I would suggest that the employer’s duty of care would require this to be done. This is therefore a topic we will therefore return to once the dust has settled on this week’s Budget announcements.