Most employers still don’t fully understand Pension Lifetime Allowance issues

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Understanding the Pension Lifetime Allowance

Since the 6th April 2006 Group Life Assurance payments (on death) from a Registered Arrangement count towards an individual’s Pension Lifetime Allowance (‘PLA’) entitlement. Yet Howden Employee Benefits & Wellbeing’s (Howden) recent survey has found that almost 3 in 4 employers (73%) remain unaware of this potentially important issue.

The survey, which took place in March this year, followed the Chancellor of the Exchequer’s Budget decision to freeze the PLA until at least 2026. The PLA is currently set at just over £1m, far below its highest level of £1.8m in 2011.

The PLA has reduced significantly since that high point but also since it was first introduced in 2006. As a result, it is now starting to impact far more savers on relatively modest salaries.  This of course means that even a typical lump-sum payment of 4 x salary from a Registered Group Life Assurance scheme might breach the PLA limit, in turn triggering a potentially significant tax charge in the event of a claim. 

An alternative option is to consider the use of an “Excepted” Group Life arrangement.  Payments from such an arrangement will not count towards the Pensions Lifetime Allowance limit, therefore avoiding this particular issue at a time of great distress for the employee’s family. 

We encourage all employers to review their group life arrangements, to consider any potential exposure for their employees to this situation, and consider taking appropriate action as necessary. As ever there are a number of complications for employers to understand and consider, so we would urge employers to seek professional assistance as part of this review. 

The survey also asked employers if they communicated details of the Pensions Lifetime Allowance when undertaking their legal responsibility to enrol employees into a company-sponsored pension arrangement. The research found that just 10% of employers always referenced the Pensions Lifetime Allowance during the auto-enrolment process. The same number “sometimes” highlighted the issue, and 17% relied on their nominated professional pension advisers to reference this issue. More than 6 in 10 employers either don’t mention the Pensions Lifetime Allowance at all (20%) or were not sure (43%) on the actions needed to be taken.

Failure to communicate that you are automatically covering employees in a Registered Life Assurance arrangement, could have unintended adverse tax implications.

This issue is symptomatic of the challenges facing employers in ensuring that their best intentions in offering a generous benefits package to their employees doesn’t have unforeseen consequences or negatively impact the employees’ perception of the quality of the offer. 

Higher levels of life cover and generous pension contributions are valued by many employees. But they might reasonably have expected their employer to have considered appropriate tax efficient benefit solutions that wherever practical would seek to mitigate or avoid any unnecessary tax burden on the employee and/or their dependants. 

We encourage employers to seek advice to ensure they are fully aware of the potential tax implications of their employee benefits design, and the most common scenarios where their employees might be negatively impacted.

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