Pensions Simplification - a Trap for Employers
Originally sent: July 19, 2004Pensions Simplification. You may be fed up with hearing about this by now. But any change which effects so many people in so many ways has to be very good for our business.
I am sure you have read all the details of Pensions Simplification over and over again and are probably very familiar with the main points. Otherwise, how could you expect to give proper advice to any of your clients? Maybe you have even burned the midnight oil reading the fine print of clauses 139 to 270 of the Finance Bill 2004 ? just to make sure the insurance companies and the ?pinks? are telling you everything you need to know and are ready for April 2006.
Rather than focus on the more obvious changes, I would like to draw your attention to one implication which you may have ignored. Or which your corporate clients may have ignored.
Do you have any corporate clients offering a group pension scheme with a promise to match any pension payments made by the employees? Most such schemes would limit the liability of the employer by placing a ceiling on this promise ? but not all do.
As you are very aware, under the new regime an employee will be able to invest an amount equal to his or her salary into the pension. This is more than double the maximum that can be paid into a personal pension at the moment by the oldest employees. Higher paid employees approaching retirement might well decide to take advantage of the combination of the new rules and the generosity of their employer, make an investment into their pension equal to their salary, and then demand their employer do likewise. This could be a hefty sum ? up to ?215,000 could go into the scheme, and half of this could be demanded from the employer. Or even more could be invested, with a tax penalty. For a company with several highly paid, older staff this could present an enormous cashflow and profit problem.
Perhaps it is time for you to review all your corporate clients? pension schemes and make sure none of them could be caught in this trap. Any that have not placed limits on the employer?s contribution should consider changing the rules of their scheme now. This advice will not only be seen as good added value by your client, but will also save you a very red face and a possible complaint after the pension rules change.
Of course, where your client is the employee you could take the opposite stance ? advise the employee to go for the maximum pension from the employer. Provided that employee is not expecting to stay in the company much longer ? the atmosphere at work could become exceedingly chilly after this demand, especially if the company can no longer afford to pay the central heating bill.
Adviser Breakthrough Training Solutions Ltd. takes no responsibility for loss occasioned by any person acting or refraining from action, or in consequence of any other person acting or refraining from action, as a result of the material in this article.
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