News update – Spotting who fits the cap

Employers are being encouraged to identify employees that are likely to be affected by the incoming pensions cap.

Individuals that exceed the lifetime allowance, which stands at £1.5 million for those in a defined contribution scheme or an annual pension of £75,000 for members of a defined benefit (DB) scheme, will be taxed at a rate of 25% for any amounts above this limit.

Ian Luck, a director of pensions and financial planning at accountancy firm Smith & Williamson, said that a lack of information could make it more difficult to identify affected staff. Communicating the issue to staff will help them to recognise if they are affected. “Most organisations don’t have any or sufficient information about the baggage employees [might] have. A few [employees] will know that they have an issue,” he said.

Staff that are most likely to be affected include those approaching retirement, high earners and long-serving DB scheme members.

Luck said that employers should also identify staff that are likely to reach the limit in the first few years after A-Day. Where employees are affected, employers should review their contracts of employment to clarify what pension promises are made or implied. Existing arrangements may push staff above the limit so alternatives will need to be considered.

Luck also added that early action would prove cost-effective.