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Are Your Employees at Risk of Breaching the Lifetime Allowance?

September 3, 2018

Back in April at the start of the tax year, the Lifetime Allowance (LTA) was increased for the first time since 2010 and it has been dominating the headlines ever since.

Many people are worried that they are at risk of breaching the allowance and receiving a hefty tax bill.

These concerns are certainly not unfounded. A freedom of information request by Retirement Advantage revealed that the annual amount of tax collected from people exceeding the lifetime allowance has jumped 1000% since its introduction just over a decade ago.

In other words, £110m in tax was collected in 2016/17 from individuals breaching the LTA.

Regular Pension Reviews

An essential part of wealth and asset management is risk assessment and taking steps to avoid or mitigate any potential charges. That’s why we wanted to highlight the particular situations in which your employees may be at risk of breaching the allowance so that you can avoid a crisis before it happens.

One of the biggest mistakes that people make with their finances is to put everything in place and then leave it unattended for months or years on end. Many of us continue to save for our retirement but fail to keep an eye on the value of our pension pot.

Regular pension reviews are essential to ensure that protection arrangements fit with every individual’s current circumstances and evolving retirement goals.

Unless your employees have regular meetings with a professional financial adviser who is fully aware of every individual situation, nobody is going to tell them when they are at risk of breaching the LTA limit, which currently stands at £1.03m.

Even then, every individual should be personally aware of the value of their pension pot. It is the responsibility of the employer or the pension scheme administrator to provide a pension pot valuation on request from the employee, which will also show each individual how much of their LTA has already been used.

Hitting the Limit

Those who are not fully aware of the importance of staying on top of their pension pot value may also think that breaching the LTA is too remote a possibility even to consider. But the statistics prove otherwise.

Wealth at Work points out that any employee making healthy contributions into their workplace pension scheme along with the associated employer contributions may be at risk.

With pay rises, positive market performance and pensions growing free of tax usually over a long period of time, it’s never safe to assume that any employee is far away from a breach.

In addition, Wealth at Work explains that many employees in defined benefit (DB) pension schemes are unaware their pot is valued at 20 times their annual pension for LTA purposes.

If the employee decided to take advantage of pension freedoms and transfer their DB scheme, the transfer value could be up to 40 times the annual pension which would again risk exceeding the LTA.

The Auto-Enrolment Question

Even those employees who have chosen to opt out of the workplace pension scheme may still be at risk due to regulations stating that workers must be re-enrolled every three years. Wealth at Work explains that one month’s contributions could invalidate a previously applied for protection without employees even realising it.

Awareness is key and it is the responsibility of the employer to inform every employee whom they plan to re-enrol to ensure that they understand that pension contributions will be deducted from their monthly pay.

How to Avoid the Impact of The LTA Charge

There are many different routes that employees can take in order to avoid LTA charges. Early retirement is one option although this is not a luxury that all of us can afford.

Employees may consider opting out of the workplace pension scheme to consider alternative savings vehicles such as a cash ISA. However, this would mean missing out on employer contributions.

We would generally advise against opting out because enrolment in the workplace pension scheme is usually in the employee’s best interests.

The best route will always depend on the level of risk you are willing to take as well as other key factors, such as your investment portfolio, marital status, any dependents you might have and how many years it is until your desired retirement age.

We would suggest speaking with a qualified financial adviser who can assess your pension pot value and suggest alternative tax-efficient savings routes where necessary.

Tax charges for breaching the LTA have almost tripled over two years and it’s essential to seek expert advice to protect yourself and your employees, and avoid serious financial consequences.

For guidance and tailored advice, give our team at Vintage Corporate a call today on 020 8371 5232 or email