Implications for UK employers if pensions taxation changes

UK employers will be used to pre-Budget speculation about changes to pensions taxation and will know that this often comes to nothing. Trying to pre-empt Budget changes is difficult when policy could go in so many different directions and when there are so many ways of settling points of detail.

Employers should, however, be aware that if major changes are announced, they will have a meaningful to-do list. This might include:

• Reconsidering the balance of pay and pensions in compensation packages – or the options employees have – if tax changes make pension saving less attractive than now for some employees and more attractive than now for others.
• If changes are implemented in a way that will affect some employees’ take-home pay, reviewing whether flex windows will allow employees to make offsetting changes at around the same time.
• Assessing implications for take-home pay and communicating to employees, so they know what to expect before receiving their pay packet.
• Working on the basis that many employees/schemes will have a poor understanding of tax and may stumble into paying more than they need to. For comparison, WTW has found that supplying guidance at retirement can significantly reduce the likelihood of members cashing out pension pots in one go and having to pay 40/45% tax as a result. Similarly, messaging from Government or in the media may understate/overstate how incentives to save through pensions are changing (for example, by presenting the full value of a government top-up as free money or by suggesting that pensions is no longer tax-advantaged for some groups).
• Assessing how existing contracts interact with any legislation that might change the definition of pension contribution.
• If administration of pension contributions becomes more complicated, this may strengthen the case for consolidation and the choice between outsourced pension providers.  
• If “scheme pays” facilities are required for higher rate taxpayers, employers will need to discuss with their pension provider/administrator.
• If tax relief changes affect the value of contributions reaching a defined benefit scheme, considering funding implications and how to put things right.
• The effects on DB funding and journey planning if National Insurance charges make employer pension contributions more expensive – for example, how this affects the cost of deficit contributions or of injecting cash so the scheme can afford to buy out benefits with an insurer.
• How any changes to tax-free cash might affect DC investment in the run-up to retirement and/or the amount of pension that DB members are likely to commute.

Contact

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David Robbins

Director, Retirement

email Email

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Dave Roberts

Director, Retirement

email Email phone +44 20 7170 2629

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Glyn Bradley

Director, Retirement

Glyn Bradley is a Director in WTW’s Pensions Technical Unit with over 20 years’ experience working with a broad range of pension schemes. A Budget Day veteran, for the last 15 years he has specialised in technical and regulatory matters, including HMRC rules, contracting-out, and Collective Defined Contribution. Through his work for the Chartered Institute of Taxation he is often in direct contact with HMRC, and is a regular attendee at its Pensions Industry Stakeholder Forum and inheritance tax workshops. An actuary by training, Glyn Bradley is the current chair of the Institute and Faculty of Actuaries’ Pensions Board.

email Email phone +44 161 8292605

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