Urgent need for employment and remuneration contracts to be reviewed. April 2014 is crunch point when first monthly salary is paid after new rules apply.

A combination of changes to pensions, taking effect in April this year, mean that employers of higher earning individuals should urgently review their employment contracts and remuneration packages and renegotiate them where appropriate. There are two developments which apply from 6 April 2014 and which prompt the need to review arrangements: The drop in the pension lifetime allowance to £1.25million, down from £1.5m; and; A reduction to £40,000 pa on pension contributions which attract tax relief, down from £50,000pa. The recent introduction of pension auto-enrolment, which obliges employers to automatically enrol employees into the employer scheme, complicates issues, according to Ian Luck, financial services director at Smith & Williamson, the accountancy and investment management group. He explains: “Pension auto-enrolment could severely impact individuals who have registered for fixed protection as auto-enrolment could mean they inadvertently breach their undertaking to not make any further pension contributions.

“The reduction in the lifetime allowance potentially puts thousands of people at risk of jeopardising their pension arrangements. And very importantly, individuals have just one month to opt out of their scheme after pension auto-enrolment started, before their fixed protection is revoked. Employers may therefore feel that they have an obligation to flag the issues to employees, but the legislation strictly forbids them in any way to encourage members to opt out. Employees, directors and partners at an organisation may be affected, irrespective of the type of pension plan in which they are enrolled. There can be particular issues for those in final salary schemes. Luck also outlines how death in service benefits can be an issue: “Should an individual die, the death in service benefits are frequently written under pension scheme rules. This could mean that someone who opted for fixed protection and who dies, could find the lifetime limit is breached, potentially giving families a major financial problem to resolve at a very difficult time.”

From 1^st April 2014, firms with as few as 160 staff have to adhere to the rules of pension auto-enrolment.  From 1^st July, employers with as few as 62 individuals must have their auto-enrolment schemes up and running. Luck explains that bonus sacrifice (where people elect in advance for their bonus to go straight into their pension plan) is also a potential hazard, given the reductions in allowances. Certain industries, such as banking and finance typically have their bonus round in the Spring. He adds: “Rightly, Employers will want to keep their staff up to date on these developments, but I fear many employers will struggle, given the mass of developments which have come through in a short space of time. It is essential to communicate these changes properly in order to keep staff, and particularly senior and potentially the most valued individuals – on side. Perhaps the only way to do this will be to engage an authorised adviser.”