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Employers risk LTA protection breach

Employers risk LTA protection breach

Employees could be in breach of their lifetime allowance protections if their contracted out benefits are converted in a method favoured by almost half (43 per cent) of employers.

According to a survey from the Association of Consulting Actuaries, which polled 308 employers running 510 defined benefit pension schemes, large numbers preferred the conversion method for their GMP legacies.

The problem with this method, from a member's perspective, is that it will likely uplift the value of their pension, which could trigger an annual or lifetime allowance tax charge.

The lifetime allowance – the limit on the amount of money that can be saved in a pension without triggering a tax charge - currently stands at £1,055,000 and there are three fixed protections in place – one from 2012 at £1.8m; 2014 at £1.5m; and 2016 at £1.25m.

These allowed people to lock in previous thresholds but once breached the saver faces a tax bill and their LTA protection is lost.

Converting the GMPs into a normal scheme benefit is one of a number of options to solve a problem dating back to the Lloyds case in October 2018 when the High Court ruled that trustees of the bank’s pension scheme must equalise benefits between women and men who have guaranteed minimum pensions because of contracted out benefits.

The ruling was considered a solution for a pension problem spanning almost three decades, and DB schemes are now having to decide how to equalise the contracted out benefits of their members.

FTAdviser reported in February that about 100,000 savers could face a six-figure tax bill if their scheme opts to convert the contracted-out benefits.

ACA's research found despite the majority of schemes preferring conversion of benefits, almost a third (31 per cent) were leaning towards the year-on-year calculations and dual records, with 26 per cent still undecided.

The government has formed a working group to consider the pension tax issues as a result of GMP equalisation, with updated guidance expected this autumn.

The aim is to find solutions that could be delivered within the existing legislation, which would be supported by guidance where appropriate.

The ACA research also found administrative complexity was the major issue for employers, with 64 per cent of respondents saying it will take more than two years to fully equalise pensions for the effect of unequal GMPs in their schemes.

Tax and other uncertainties only ranked fourth in companies’ biggest challenges when dealing with guaranteed minimum pension equalisation.

According to Jenny Condron, ACA’s chairwoman, it was surprising that employers saw missing and poor data as one of the less significant challenges in addressing GMP equalisation.

She said: “We believe many schemes will need to focus resources on their data as a first step in addressing this complex issue, including completing long-running GMP reconciliation exercises.

“The recent guidance issued by the GMP Equalisation Working Group will be helpful to the many employers and trustees who are either totally undecided or who are beginning to grasp the nettle of how they might act.