Employers should help high earners decide how to protect their pension. Those likely to have pensions savings near to or over the £1.5m lifetime allowance limit on A-Day will be affected. If no action is taken, staff will be hit by a 55% ‘tax and recovery charge’ for savings over the cap.
One option is ‘enhanced protection’, which enables employees to bypass the recovery charge on all future growth of their pension fund following A-Day. But staff will be unable to save any more into the fund.
Liz Fleming, pensions strategy manager at pensions provider Scottish Life, said: "The sting in the tail there is you have to come out of pensions savings altogether and not make any further contributions." Employees that want to take up this option only have until A-Day to do so.
"If [staff] are going to go for enhanced protection, they must leave the pension scheme before 5 April 2006. If any contributions are made after [that date], they will accrue the recovery charge," said Fleming. If staff are unable to accrue any further pension, this may have an impact on their remuneration package. So employers will need to consider alternative options to offer to relevant staff, for example, to replace employer pension contributions.
But employers may find it difficult to determine exactly which employees are likely to benefit from taking this type of protection. Indicators will include investment choices, employees’ potential salary growth and the time left before retirement.