5 key actions for employers after Lifetime Allowance abolition

The removal of the Lifetime Allowance should simplify pension tax, but it gives employers and employees a few things to think about

The abolition of the pension Lifetime Allowance in the Spring Budget came as a surprise to many. But the budget also announced changes to the tax-free cash allowance and the continuation of the annual allowance taper, which means that not all complexity in pensions tax has disappeared.

The LTA was abolished to remove some of the barriers to pension saving. Previously, employees who had reached or were close to reaching the LTA limit were likely to opt out of pension saving, either to avoid paying the LTA charge of 55%, or as a condition of protecting a higher LTA.

These employees are now able to re-start pension saving and get tax relief on contributions of up to £60k.

This may mean employees will want to take advantage of the LTA abolition by increasing their savings and maximising their tax relief. Employers should consider whether they need to make changes to their pension strategy to support employees looking to take advantage.

Here are 5 key actions:

1. Check your current policies

You should check your policies and procedures to clarify the detail on benefits in lieu of pension saving for those previously affected by the LTA and Annual Allowance (AA) limits and update policies if needed.

In 2020, many employers put in place a £4k cap on pension saving plus a cash allowance. Changes to the tapered AA mean all employees can increase pension saving (minimum AA is now £10k) so check whether your current design remains appropriate.

2. Look at those affected

Those who had breached the LTA limits, or put in place protection to keep a higher LTA, might want to save more into a pension. You should check that your criteria for identifying employees who may be impacted by LTA/AA is still appropriate.

You should also consider the support you give to employees to understand how the abolition of the LTA affects them and what their options are. Pensions tax can be complex for employees and so providing general briefings on the changes, financial guidance or advice will help employees better understand the implications of the changes.

For members receiving benefits in lieu of pension contributions, you could also advise them of the change, if they’ve not already enquired about recommencing saving.

3. Update your communications.

Check that your communications (eg booklets, member letters, websites, policies) reflect the changes to the LTA and AA.

One of the less highlighted changes in the Spring Budget was that the maximum pension commencement lump sum (PCLS) for those without a protected right to take a higher PCLS will be frozen at its current level of £268,275. This should also be communicated to employees as part of any review of communications.

4. Check processes and structures

The removal of the 55% LTA charge came into effect from 6 April, but will not be abolished completely until the 2024/25 tax year. Full details are still to come. In the meantime, while employees will not have to pay the 55% LTA charge on the lump sum in excess of the LTA, administrators still have to complete LTA checks when paying benefits. Check that your systems are still able to do this and that you comply with HMRC reporting requirements.

Many employers have put in place Excepted Group Life arrangements to avoid LTA charges on death in service lump sums. Abolition of the LTA in 2024 may provide an opportunity to review the structure of these arrangements, but employers may wish to leave them in place until legislation gives clarity on how the LTA will be removed.

5. Consider fairness to everyone

Alongside the abolition of the LTA the Money Purchase Annual Allowance (MPAA) was increased to £10k from £4k. This means older employees who have accessed DC pension savings have more scope to plugs gaps in pension savings caused by factors such as financial turmoil in the investment markets or any periods of economic inactivity.

Where employers are looking to tempt older workers back into the workforce to plug skills gaps, a generous pension arrangement may be attractive. However, you should be cautious of providing a pension offering which is more generous for older employees to avoid potential age discrimination.