The financial pressures on employees have been significant over the last year, so it’s even more critical that their retirement plans are robust. What do you need to know about pensions for the tax year 2021/22?
There is growing evidence that employees have decided to opt-out of workplace pensions given the pressure on household finances. They should be aware that this will also mean that many will lose life insurance embedded in their pension scheme. An alternative option might be to opt down rather than opt-out. It is worth exploring with your pension provider if they offer the option for employees to reduce their contributions below the statutory minimum for some time. They will, of course, revert to the statutory minimum in force at re-enrolment. However, the employee could then opt down again.
Employers should not promote opting down as this is a breach of the “sole or main purpose test” in s.54 Pensions Act 2008, which prohibits employers from offering any inducement that would be detrimental to the employee. The reason that promoting opting down would breach this test is that if somebody opts down, they become an entitled worker rather than an eligible jobholder, and as such, the employer is not obliged to make any contributions.
Sadly, COVID-19 has presented an opportunity for fraudsters in many areas. The Financial Conduct Authority has been investigating 85 rogue pension advisors who have been encouraging people to give up final salary pensions for transfer out values, only to find that the risky investments that they were offered as a home for their fund and the very high charges that had not been made clear to them have led to hundreds of thousands of pounds being lost. For those aged under 55, there is also a tax charge to pay as HMRC will class this as an unauthorised withdrawal. The government is trying to raise awareness of pension scams, but you should inform staff too.
From 6th April 2021, the lifetime allowance (LTA) will rise by inflation to £1,078,900, up from £1,073,100 in 2020/21. The LTA caps the value of all pension funds (not including the state pension) and the benefits that can be drawn from the fund without incurring an extra punitive tax charge. While this sounds like a very significant pension fund, for those in a money purchase arrangement, a £1m fund will only purchase around £28,000 per year as an annuity.
The Pension Schemes Bill is now awaiting Royal Assent to become the Pension Schemes Act 2021. It introduces a new type of pension scheme called collective money purchase (CMP). A CMP aims to reduce the risk to an employer offering a final salary pension scheme by providing a halfway house for employees rather than just being moved to a riskier money purchase option, where the employee’s personal final fund value depends upon investment returns at the point that they retire. In a CMP, investments are pooled across the whole membership and target a final pension for the employee, for example, 30% of the final salary at retirement.
An actuarial calculation is conducted each year that can lead to pensions in payment having to be reduced to keep the fund finances in a strong position for all members. So, while a final pension is not guaranteed, it is hoped that a more significant investment pool will drive greater returns and more likely that the target will be met.
If you’d like to discuss anything raised in the above blog post, or want some further information call Unique Payroll on 01473 461 028 or visit https://uniquepayroll.co.uk/.
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