Pensions: recent announcements

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02 November 2010

Employers will need to reconsider their pension arrangements after recent announcements from the government.

Recent pensions headlines for employers
 
Employers will need to reconsider their pension arrangements after recent announcements from the government.

Tax
 
The annual allowance (AA) for tax relieved saving in a registered pension scheme will be reduced from £255,000 to £50,000 in April 2011.  Employers with highly paid executives are likely to consider limiting their pensions to a tax efficient amount.

In a defined benefit (DB) scheme the AA equates to an increase in pension entitlement of about £3,000. 

Employers should review each individual's position separately and should consider whether any pay increase will be pensionable.  Whatever changes an employer makes to its pension arrangements, it will need to make sure the rules of its scheme are consistent with individuals' contracts of employment. 

For high earners who exceed the AA, the result can be a very high tax liability.

Pension saving between 14 October 2010 and the end of the current tax year can be subject to the new AA. But transitional rules offer some help. 

Amounts paid into a scheme as part of a severance arrangement will count towards the AA.

State pensions

The rise in state pension age (SPA) is to accelerate:

  • for men and women it will increase from 65 to 66 between 2018 and 2020 and
  • in preparation, SPA for women will rise to 65 by November 2018.

Many employees will hope to work until their state pension is available.  The government's plan to abolish the default retirement age of 65 from October 2011 will help them do so.

Automatic enrolment

After a review the government has confirmed that employers are going to have to enrol their employees automatically in a workplace pension scheme and contribute for them.  There is no exemption for small employers.  

The enrolment obligation will be phased in between October 2012 and September 2016, larger employers first.  As a general rule, employers must enrol employees who are between age 22 and state pension age and are earning more than the personal allowance for income tax (£7,475 for 2011/12). 

Employers will be able to use their own DB or DC scheme (if it meets a quality test) or the National Employment Saving Scheme (NEST)

An employer with a DB scheme will be able to delay auto-enrolment until 2016.

In DC schemes the obligation to contribute will be introduced gradually, rising to an 8% minimum (with at least 3% from the employer) from October 2017. 

Contributions are likely to be based on earnings in the band £5,715 and £38,185 (in today's terms).

More information

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