For whom the Scheme Pays? Final Salary Schemes and High Earners
As we mentioned in our last post we were worried when we started the blog whether there would be enough to write about! We certainly needn’t have worried.
This article is really focused on employers who run final salary schemes and are likely to have members of their scheme who are long-serving and who probably earn over about £60,000. Equally it will apply to you if you are one of those members. Otherwise you may want to click away or speed read this post.
This month the Government will publish a piece of legislation that is rather bizarrely called “scheme pays”. Well why not – someone has to pay after all!
Scheme pays relates to will make it much easier for individuals to pay annual allowance charges that they may face. Great news for members facing a big tax bill but employers need to keep an eye on the cost implications for the scheme. The charge results from the annual allowance for pensions tax relief being reduced from its current level of £255,000 to £50,000.
The problem is that most employers thought that faced with the prospect of a big tax bill most members would opt for a cash payment rather the increased benefits. Now there’s likely to be a fly in that particular ointment. Scheme pays will make it possible for members to make the pension scheme pay most of the tax bill for them. Other than in exceptional circumstances can the scheme refuse.
Scheme pays will take much of the sting out of the annual allowance charge by reducing the cash flow strain on the individual. The current approach that most employers are adopting of offering affected people, particularly in final salary schemes, a choice of whether to maintain their full pension and pay the tax (stay-and-pay) or take a restricted benefit with a cash top-up, will find that for their people stay-and-pay is the better choice.
This is bad news for employers. This is because the cost of providing the benefits and the cost of administrating scheme pays will be significant. Draft legislation has already been published that means a scheme must provide the member with a Pensions Savings Statement. This will calculate the pension amounts for that tax year, and the three preceding years. Coupled with the difficulties of an annual ‘scheme pays’ event, the administration costs could well be thousands of pounds a year for each individual member involved.
Employers may well need a Plan B or even C to cope with all this. Plan B may be to loo at any offer you have made members to make it more attractive if the cash being offered is not enough to make this worthwhile for the member.
Plan C will apply to those employers who want to reduce costs and is simply to remove the choice altogether. Given current economic conditions employers may well look at introducing a system that makes sure that benefits granted each year are not more than the annual allowance.
Coupled with the reduction in the Lifetime Allowance that we wrote about in our earlier post Pension Snakes & Ladders this all means if you are running a final salary scheme and have higher earners you need to be looking at all this to make sure that you understand the implications.
If you would like some help with this, or if your existing consultant hasn’t highlighted this yet, 44 Financial would love to assist. Drop us a line at talk2us@44financial.co.uk.