OREANDA-NEWS. Standard Life is working closely with corporate advisers, payroll teams and HR departments to help them inform and support their employees who could be impacted by the changes to the pension lifetime allowance (LTA) being introduced on the 6th April 2014. These changes can impact on employees in both defined contribution (DC) and defined benefit (DB) schemes.

The LTA will drop from GBP 1.5m to GBP 1.25m when the new tax year starts, and HMRC predicts the new limit will affect around 30,000(1) people immediately and 360,000* pension savers in the longer -term.

Workplace pension savers who inadvertently exceed the LTA will expose up to GBP 250,000 of their pension savings to a 55% tax charge - leading to an unexpected tax bill of up to GBP 137,500. It makes monitoring potential investment returns in the future increasingly important as pension pots near the limit.

The pending decrease in limit is not only likely to impact those with long service in a company pension scheme and higher earners, but also those who will become higher earners in the future. An employee in a DC scheme who is 10 years from retirement with multiple pension pots worth around GBP 700,000 could exceed their allowance if their pot grows at 7% a year - even if they stop paying into it now(2). Or if a person in a DB scheme is set to receive a final salary pension of around GBP 60,000 they will likely be caught by the new limit. Even if their expected final salary is less than this, if they have also saved into a private pension combining the two funds together could see them close to the limit.

Standard Life has been proactively working with corporate advisers and employers to identify which staff could be at risk, helping employees understand the changes and outlining what their options are(3).

Commenting, Alistair Hardie, head of customer consolidation at Standard Life, said:

“We are working with corporate advisers, HR and payroll teams to help them ensure their staff avoid sleepwalking into an unnecessary tax charge. And if people think they might be impacted, they should seek financial advice soon, well ahead of the April deadline to find out what the best next steps for them could be. Options could be individual or fixed protection or to continue to save and take a tax charge. Ideally, we would recommend people aim for the end of February to have collated all their necessary details and to have arranged a meeting with their financial adviser. Leaving it any later could result in them unfortunately slipping past the 6th April deadline. And when you take into consideration the tax year end is one of the busiest times for advisers, getting started on this early is a must.”

Research for the DWP shows that an individual will work for an average 11 employers(4) during their lifetime, which means some people are likely to have accumulated many different pensions over the course of their careers, making it more difficult to get a clear view of their overall pension fund value.

Consolidating these pensions could make it much simpler for people, providing greater clarity and making it easier to judge if they might be impacted by the LTA cut. There are other things to consider when thinking about consolidating, so seeking financial advice before doing so makes sense as it may not always be the best option.

The Government's long term plan is for most pension pots to be consolidated as people move from job to job, but it may be some time before this is implemented and it is not certain that it will include pension pots accumulated to date.

Hardie adds:

“Pension savers who might be affected by the drop in LTA will need to gather the current value of each from all of their pension providers - and that can take time. If they don't have online access to that information and have many different plans, it may take even longer. They might have to find all the paperwork, request an information pack from each pension scheme provider to work out their cumulative total and may need advice to see if they are at risk of breaching the LTA.

“It might take somebody weeks, if not months, to gather all the documentation required to work out their total pension value, particularly if they have many different pots. Pensions savers who might be affected need to make sure they don't miss any of their pensions out and need to start things moving now.”

Research by YouGov, on behalf of Standard Life, shows less than a fifth (19%) of pension holders know what the LTA is and only 31% of those earning GBP 50,000 or more - the salary earners most likely to be impacted by the change - are aware of.

Standard Life has published a report examining how the LTA will impact people. It outlines the choices savers have and the important decisions they need to make well ahead of the end of this tax year. It also details how people might accidently slide into a tax charge due to potential investment growth; multiple pension pots; or being in defined benefit schemes with a period of long service.