Dealing with the interference of protection and employer sponsored pension contributions

19 Mar 2016

Many firms offer an employer contribution,  some require an employee to make a contribution of their own volition, but most do wish to pass on the monetary value of this pension contribution if an employee refuses to join the pension scheme.

However, changes to pension legislation, and in particular the imminent reduction in tax efficient allowances, means that many employers are reconsidering their options. The two allowances that will reduce from 6th April 2016 are:

  • the annual allowance, and higher earners may only be able to pay in as little as £10,000 per annum
  • and the lifetime allowance which is the most tax efficient fund that can be built up inside a pension, and this falls from £1.25m to £1m

Clearly the benefit of a pension contribution is that it allows an employer to help employees fund for a retirement income – it is effectively deferred pay. We understand that in the event that an employee is likely to incur lifetime allowance charges or annual allowance charges (often both) then an employer may think it is fair to pass on the saving that is made.

To avoid abuse of this concession the employer would normally require evidence of the reason why the employee is affected; in the case of the annual allowance the evidence is straightforward, but would require an employee to provide evidence (e.g. a tax return, or SA302)

In the case of the lifetime allowance, we would suggest that a provision of a fixed protection certificate would give evidence that the lifetime allowance either has been exceeded or at least protection against this event has been applied for.

However, in respect of Fixed Protection 2016 it seems likely that no certificate will be issued and relevant individuals will only have a reference number. Whilst the exact implementation of this rule is not yet known, employers would be expected to verify an individual who has fixed protection by using this reference number on an HMRC website. To make matters worse the forms for Fixed Protection 2016 are not expected to be available until July at the earliest and as there is no timeframe for an individual to apply for FP 2016, employees may not have the evidence but must be opted out of any schemes or they break Fixed Protection!

We are able to offer advice in this area and if you would like to protect employees who have lifetime or annual allowance issues, you may wish to consider passing on some of the saving of contributions.

We have communications that will assist with this using some of the rationale above. Please do not hesitate to get in contact.

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