- Nearly 3,000 investors have lost LTA protections since 2016
- Auto enrolment and life assurance schemes likely cause for inadvertent breaches
A recent Freedom of Information (FOI) request has revealed that numbers of those breaching their Lifetime Allowance protections is high.
The LTA introduced in 2006 is a cap on the total amount a person can pay into their pensions before they are liable to paying additional tax. The current LTA for 2019/20 is set at £1,055,000. But LTA protection can become voided in many ways which can lead to an LTA tax charge to be levied to the member when they take their benefits, in some cases, these tax bills can be significant.
Figures released by HMRC in response to the request by investment and stockholder consultancy AJ Bell, appeared to indicate that the majority of breaches (7,000) have occurred since auto-enrolment. Overall, 12,000 investors have lost their LTA protections since 2006 and have been liable to pay additional tax.
It is likely that the introduction of auto-enrolment in 2012 has meant those who have already reached their LTA may have inadvertently continued to pay into pension schemes because they failed to opt-out. Anthony Kemp, DC Commercial Leader at Aon also believes that registered life assurance schemes will also be a contributing factor; “for many individuals, their employer’s life assurance policy can inadvertently void LTA protection conditions”.
“When designing an employee’s benefits package there is a general lack of awareness that auto-enrolment is not mandatory for those with pension protections. Since April 2015, employees that have HMRC protection do not need to be auto-enrolled into a pension scheme – this change is the likely reason behind the significant drop in individuals losing their LTA protections in 2016. There is, however, a general assumption that employers must enrol all staff come what may. I do believe, that awareness is now increasing within employers that they should not be auto-enrolling everyone, particularly not their employees that have a lifetime allowance protection in place.”
“This information highlights three key areas of improvement for employers
- Auto enrolment / re-enrolment processes: this should be an opportunity for employers to highlight those employees who are approaching their LTA limit and potentially block auto enrolment / re-enrolment for those employees
- New joiner process: administrative processes should highlight potential LTA conflicts with new hire’s. This is extremely important for new employees making decisions about their future benefits, particularly when offering any registered life assurance plan or pension scheme membership
- Improved financial education: tailored information will help support employees at all stages of their careers, particularly those approaching their LTA limit”
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