TT167: Major Pension Scheme Changes
There are a number of significant changes affecting pension scheme rules coming into play in 2012 that impact both individuals and employers.
Changes for individuals
From 6 April 2012 – The lifetime allowance (The maximum fund value that can be crystallised at retirement as tax free cash and income) is being reduced from £1,800,000 to £1,500,000.
Any value in excess of this amount would be taxable – potentially at 55%. It is possible for individuals to apply for lifetime allowance protection, thereby retaining the higher limit. They must do so before 6 April 2012. After obtaining protection, no further contributions can be made.
Changes for employers
The Government is continuing the implementation of Workplace Pension Reform measures aimed at getting more people to save for retirement. This will see the gradual introduction of automatic enrolment of staff into a suitable pension scheme, to be staged in between October 2012 and October 2016. The timing of these measures will depend on size of workforce for specific employers.
The new rules in effect mean that employers and employees will be required to contribute to a pension scheme, based on a percentage of qualifying earnings. The level of contribution is being phased in from the date that an employer is staged and October 2017 at which point, the total contribution payable will equal a minimum of 8% of qualifying earnings. The default split of this contribution will be as follows:
- 3 % – Employer contribution
- 5 % – Employee contributions (1% of this comes in the form of tax relief).
It is possible for employers to contribute a higher proportion than 3%, thus reducing the employee level.
In addition, employers will have the choice of a traditional commercial scheme offered in the market place, or the new Government designed scheme, the National Employment Savings Trust, or NEST.
Managing the change
Employers need to consider a range of factors.
- How will payroll deal with automatic enrolment and payroll deduction?
- What is the likely cost of meeting the new regulations?
- Does a commercial scheme meet the rules and make the most sense – or would we be better adopting the new NEST approach?
- How should we communicate the changes and impact of these changes effectively within the organisation?