A change in pension tax rules could land some with group life policies with hefty bills. But, as Nick Rumble finds, there are solutions.
From the start of the new tax year, companies and their advisers will find that the problem that once beset the highest earners will now start to have an impact on employees who may not think of themselves as earning exceptional pay.
This is due to a further tightening of the restrictions on pension tax relief for individuals under registered pension schemes, announced on 5 December 2012. For the tax year 2014/15, these restrictions can be summarised as follows:
- The Standard Lifetime Allowance (LTA), which governs the maximum lifetime pension savings, will fall to £1.25m;
- The Annual Allowance (AA), which caps pension savings qualifying for tax relief in a tax year, will fall to £40,000 pa.
Tax charges will apply where either of these limits is breached. However, in the case of the latter, credit can be taken for any unused AA carried forward from the previous three tax years.
For those having to reconcile what has already been accrued under the previous limits with the new rules, there is further modification to the protection given.
The Protected Limits
Those who have obtained protection of funds greater than the prevailing LTA limits are as follows:
- Pension saving before 6 April 2006
LTA of £1.5m introduced from 2006/7 tax year
- Primary Protection (where savings in excess of £1.5m);
- And/or Enhanced Protection (provided no further ‘relevant benefit accrual');
- Pension saving before 6 April 2012
LTA had increased to £1.8m but reduced to £1.5m
- Fixed Protection: personal lifetime allowance of £1.8m but no further ‘relevant benefit accrual'
- Pension saving before 6 April 2014
LTA reduces to £1.25m
- Fixed Protection 2014: personal lifetime allowance of £1.5m but no further ‘relevant benefit accrual';
- Individual Protection 2014 (where savings in excess of £1.25m): personal lifetime allowance set at lower of level of savings as at 5 April 2014 and £1.5m.
This will have an impact on registered group life assurance, which will also be caught by the new limits, in as much that any lump-sum payment on death forms part of the accumulated pension benefit with reference to the prevailing LTA at the time of death.
Furthermore, the values of benefits that have already come into payment. For example, a pension in respect of service with a previous employer, or a separate lump sum death benefit already paid, will have to be taken into account. Where the lump sum death benefit exceeds the deceased available LTA, the recipient would have a 55% tax charge on the excess amount.
So, the composition of the member's total pension - not just their current service entitlement - means the employer is not necessarily likely to assume, with confidence, that a generous registered scheme does not create a tax burden for the employee's estate.
The notion that an employer can manage their registered scheme by use of an offset, namely just topping up the life assurance to the LTA limit, is problematic because, generally, the employer will not know the total value of an employee's benefits from all sources.
