21 March 2021
Ian Neale, director at Aries Insight, argues that payroll professionals can help
Recently a neighbour told me he is planning to cash in his pension next year. He understood that he could do that when he turns 55 but wanted confirmation from me, because he knows I work in pensions. I gave him the usual warning that I’m not authorised to give financial advice. The law permits benefits to be taken from age 55, I said, though I would have to see the rules of his pension scheme to see if he actually can cash out.
His pension is worth around £100,000, he thought. He was surprised when I told him only a quarter would be tax-free, with the rest taxable at his marginal rate. “Can they do that?” he asked. I explained that contributions are paid from untaxed income, but the government gets its tax back when benefits are taken.
Cue further consternation when I explained that HM Revenue & Customs require the pension payroll administrator to deduct tax on the assumption that a similar sum would be paid in every following pay period for the remainder of the tax year – meaning a 45% tax hit. I quickly added that excess tax could be reclaimed by filling in a form (either a P53Z or more likely a P50Z; but I didn’t descend into such jargon). I sensed we’re likely to be having a further conversation, although I strongly encouraged him to find an independent financial adviser.
My neighbour was talking about taking what we know as an UFPLS (uncrystallised funds pension lump sum). He runs his own business, in the construction industry. He’s done well taking care to salt money away in a pension, but he isn’t aware of the rules and regulations governing UK pension arrangements; well, few workers are. That’s where payroll and human resources (HR) professionals can help.
Since the advent of automatic enrolment in 2012 and pension freedoms in 2015, workers are more aware they have a pension. As they get into their fifties, they are more likely to want to know what they can do with it. Employers have often been very wary, though, of telling their workers anything about their pension, fearful of transgressing the line between information or guidance and ‘advice’. This is not helpful.
One solution is to arrange for a financial adviser to come in. The employer can pay up to £500 per employee for information or advice in connection with the individual’s pension arrangements or in connection with the use of their pension funds, without this being treated as a benefit in kind. For the exemption to apply, the employer has to make the arrangement generally available to employees; at least all those over age 50 and working at a particular location.
...rules and regulations governing UK pension arrangements...
Separately from this, a registered pension scheme that includes an arrangement that provides money purchase or hybrid benefits can fund a member to take regulated financial advice in connection with retirement planning. The payment must be made directly to the regulated financial adviser that provides the retirement planning advice. The maximum amount that can be paid out to fund such advice is limited to £500 in any one tax year. A person can use this allowance up to a maximum of three times during their lifetime. There are no age restrictions on when the advice can be taken.
Individuals will still have questions though, and it’s better they come to HR or payroll than rely on what friends or family tell them. As the end of the tax year approaches, higher-paid staff might be anxious about the possibility of an annual allowance charge arising. The complications of the taper caused huge problems last year for National Health Service staff; and while the thresholds have been lifted, checks might still be required. What income counts in the calculation, for example. How about the interaction with salary sacrifice?
It might be assumed by employers that now auto-enrolment is bedded in, it runs smoothly; but payroll professionals know differently. Required communications are prescribed in some detail, and with the onus on the worker to follow the correct procedure to opt out, for example, mistakes will occur.
Brexit has brought new problems for pensioners residing outside the UK who’ve been used to receiving payments in an overseas bank account: some providers can’t do that any more, and only pay pensions to UK bank accounts.
The need for financial awareness doesn’t stop with retirement, of course. Anyone responsible for a pension scheme payroll will be used to queries around death benefits, for example. Beneficiaries will often be unaware they might have options which need to be explained. Children might need to be set up on the (pay as you earn) payroll.
The general lack of financial awareness in the population is particularly acute when it comes to pensions – a state of affairs ripe for abuse by scammers. For the great majority of workers their pension is the most valuable possession, apart perhaps from their house. Payroll can be a huge help in protecting them – if they’re ‘pension wise’ themselves.
Featured in the April 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.