LGPS | Pension Taxation Briefing | October 2024
Navigating changes to pension taxation
The area of pension taxation is one which continues to evolve and is certainly very different to the regime introduced when the “simplification” rules first emerged in 2006. Many in the industry, in particular those on the front line of administration and members themselves, often raise an eyebrow or two to the word “simplification” given the complexities that have arisen over the years.
Further changes ahead
The Chancellor of the Exchequer, Rachel Reeves MP, will deliver the Labour Government’s first Budget on 30 October 2024. The Government has already ruled out raising income tax, national insurance and VAT, but has also trailed that “difficult decisions” will need to be taken to deal with the £22 billion “black hole” in the public finances. Ahead of the Budget, there has been widespread speculation about where the Chancellor may look to raise taxes including capital gains tax, inheritance tax and pensions taxation.
The impact of the Budget is already being felt as there has been a significant increase in the number of pension scheme members looking to take the tax-free cash now. On budget day, if the Government makes significant changes, members and employees will want to understand how their pensions and benefits are affected quickly so Funds, and employers, should plan for action and we set out in this briefing what support we can provide stakeholders to help navigate the changes that lie ahead.
What are the key areas of focus
For different stakeholders in the Fund, the requirements and challenges will differ.
Funds
A big concern for administration teams is to not to be seen to going beyond the provision of information to members to providing advice. The frequency of change and associated complexity that has been seen in recent years has only contributed to this issue as teams look to support members in providing information but not cross the line into providing advice. This line can sometimes become blurred.
Depending on how quickly any changes are implemented, this could also lead to an increase in member queries / calculation requests. At a time where the pressures faced by administration teams are only increasing, being able to navigate their way through the changes, understand the relevant guidance and provide correct / timely information to members is therefore vital.
Indirectly, there could also be knock-on implications to Treasury Management (should members seek to retire prior to changes becoming effective) and potentially to balance sheet positions / employer contribution rates in the longer term e.g. should assumed levels of commutation reduce.
Members
As the changes continue and the complexity increases it can be increasing difficult for members to understand how their pension benefits are taxed, in what circumstances can career / life events influence this and what options are available to them e.g. carry forwards, payment of AVCs, APCs. The changes we’ve seen lately mean this is no longer just a high earner issue. With the introduction of Pension Dashboards in the near future increasing the level of information available to members, it’s vital members are able to make informed decisions around their pensions and other benefits.
Employers
For employers it will be crucial to both understand the current pension tax environment and also how this links to the overall benefit packages they provide to their staff and whether they should consider these further:
- Do benefits continue to be fit for purpose as the landscape changes?
- Do they provide staff with sufficient information so they can make decisions that are right for them?
- Will there be an immediate impact on workforce patterns e.g. increasing number of members looking to retire prior to any changes emerging?
- Are there wider implications in terms of pay / pension provision across the workforce that need to be addressed e.g. gender pension issues?
- Will the budget have implications in other areas when considering overall remuneration and benefit packages, including business continuity and inheritance tax planning
How Mercer can help
Through our LGPS, DEI and Pension Tax specialists (including independent financial advisors), we are able to provide support to all stakeholders.
Funds
We can support with advice on regulatory change and interpretation, provide guidance on individual calculations and help facilitate education and awareness to members through the sessions below and support with communications that make members aware of the Scheme benefits and the tax implications of the decisions they take.
We can also provide specialist training sessions to officers e.g. unauthorised payments, abolition of Lifetime Allowance (LTA) etc.
Depending on the changes to emerge, with 2025 actuarial valuations fast approaching in England and Wales we can also liaise with Funds to model potential Treasury Management / funding implications.
Members
We work closely with Funds and typically focus on a 3 stage approach for providing support to members:
Employers
For employers, our support can be indirect, through attendance of key personnel e.g. HR directors, at the awareness sessions referred to above, or direct where we can look to support with communications and where necessary, advise employers on their overall benefit and remuneration packages for employees. Our specialist teams can also support employers on the wider areas of benefit taxation e.g. business continuity and inheritance tax implications, and also on the topical subject of Gender Pay / Pension equity (please see our recent briefing for further information on this).
Contact
If you’d like further details of how Mercer can support different stakeholders in the above areas then please contact us:
Neville Khorshidchehr
Senior LGPS Benefits Consultant / Chartered Financial Planner
neville.khorshidchehr@mercer.com
Contact us
For more information on how Mercer can help LGPS Funds and their stakeholders, visit www.uk.mercer.com/lgps or contact your usual Mercer consultant.
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