Employees: Pensions

Posted by siteadmin on Tuesday 22nd of March 2016.

The pensions landscape has altered dramatically in recent years and will continue to change:

  • If you are not a member of a pension scheme offered by your employer, then at some point within the next two years you are likely to find yourself automatically enrolled in a pension arrangement, with contributions deducted from your pay and added to by your employer. You will be able to opt out, but generally this will only make sense if you have elected with HMRC for some form of transitional protection (including the new fixed protection to be introduced later this year).
  • The new single-tier state pension starts in April 2016, replacing both the basic state pension and the second state pension (S2P). As a result, contracting out of S2P will disappear completely. The reform will create more losers than winners in the long term and will mean that if you are currently contracted out via a final salary pension scheme, your (and your employer’s) National Insurance contributions will rise. Unless you work in the public sector, the benefits of your employer’s pension may be adjusted to take account of the increase in those employer’s contributions – assuming your employer chooses to continue the scheme.
  • State pension ages (SPAs) are on the rise, with an increase to 67 due between April 2026 and March 2028. Another rise to 68 is now pencilled in for the mid-2030s. By 2050 – so if you are 34 or under now – you could be facing an SPA of 69.
  • From 6 April 2016 there will be new rules which could effectively taper down the total amount of tax-efficient contributions that can be made to your pension arrangements if your overall income (not just earnings) exceeds £110,000. As a result, some employers are imposing a contribution ceiling of £10,000 – the new minimum annual allowance.
  • From the same date the lifetime allowance – in effect the maximum tax-efficient value of pension benefits – will be cut by 20% to £1m. New transitional protections will become available and although final details will not appear until summer HMRC has introduced an interim claim procedure for those drawing benefits after 5 April 2016.

Year End Planning: The carry forward rules allow unused annual allowance to be carried forward for a maximum of three tax years. Thus 5 April is your last opportunity to rescue unused relief from 2012/13. With the new restrictions for high earners in 2016/17, acting before the end of the tax year could be more important than ever.

Salary Sacrifice

National Insurance contributions (NICs) can cost up to 25.8% of gross pay – up to13.8% for the employer and 12% for the employee. The corollary is that avoiding NICs can save up to 25.8% of pay. A widely applied example of turning NICs to an advantage is in the use of salary sacrifice to pay pension contributions. Instead of the employee making personal contributions out of their net pay, the employee accepts a lower salary and the employer makes a pension contribution. If the employer passes on all of the NICs savings, the pension contribution could be up to almost 34% higher, as the example shows.  An attack on this in the Budget had been expected by some commentators, but instead the government said that its “intention is that pension saving… should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements.”

Year End Planning From 6 April 2016 the standard lifetime allowance will reduce again. However, there is still the possibility of claiming transitional protection if your pension benefits were worth over the current lifetime allowance of £1.25m at the date of the last change (6 April 2014), even if further contributions have been made. The claim must be made before 6 April 2017.