- Employees with DB pensions of €100,000 or more should take action now
- DB Pensions earned after 2014 will be treated more severely
- Employers should consider providing access to individual savings policies
- New pension levy of 0.15% extremely disappointing and will deter people from saving for retirement
The Government’s decision to introduce a lower cap of €2m on the annual pension that can be provided from approved pension arrangements will have implications for many employers and employees. Niall O’Callaghan, Head of DC, Mercer noted “The penalty for exceeding the cap is a 41% charge on the excess value, on top of paying income and USC on pension, giving a net effective tax rate in excess of 70%.”
Those who need to take immediate action are employees with pensions of €100,000 or more. There will be no change in the tax treatment of pension up to this level. However, employees and employers should take action regarding the build up of further pension above this amount. Pension earned after 1st January 2014 will be treated more severely. Any pension earned after 1st January 2014 is multiplied by a higher age related factor rather than the current factor of 20 and therefore reaches the €2m cap more quickly.
What employers can do
Mr O’Callaghan commented “Building up a pension beyond the level of the cap will no longer be a tax-efficient way of rewarding, and retaining, senior staff. Employers are unlikely to want to continue making significant pension contributions that will ultimately result in tax in excess of 70%.” Employees who might be affected by the lower cap in the future are going to have to plan their pension saving more carefully.
Mr O’Callaghan explained “the need for members to manage the right combination of pension and savings over time – throughout their working lives, into retirement and beyond – has never been more important. Employers who demonstrate flexibility and can deliver solutions which are tax and cost neutral will have created a significant retention tool for employees”.
He added, “employers should increasingly redirect the contributions that they were making on behalf of impacted employees into individual savings policies, as an alternative to pension. This enables employers to continue providing for the long term welfare of valued staff without forcing them to accumulate pension in a manner rendered tax inefficient by the cap”.
What employees can do
As in the past, those affected by a reduction in the cap are allowed to protect any pensions already built up prior to the change. Mr O’Callaghan noted “Most affected individuals will need to engage a pensions professional to calculate for them exactly what level of accumulated pension they can protect at the relevant date and at what point in the future they will reach the €2m cap. He added, “Even those whose pensions do not currently exceed €100,000 p.a. may need to act. They may be hit by the proposed cap if their current Additional Voluntary Contributions (AVCs), future service contributions or salary increases raise their pension benefits above the limit over time.”
The Minister stated last year the pensions levy of 0.6% would be abolished at the end of 2014. This year he announced a new pension levy 0.15% to continue to fund the jobs initiative and contribute to the cost of pension schemes deficits of insolvent employers. The detail is yet to be seen but it would seem extremely unfair if members of Defined Contribution schemes would have to contribute to an insolvency fund. “This announcement of a new levy is yet another attack on pensions and will deter people from saving for their future”, according to Niall O’Callaghan.
Mercer is a global consulting leader in talent, health, retirement, and investments. Mercer helps clients around the world advance the health, wealth, and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 42 countries, and the firm operates in over 140 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With over 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. Follow Mercer on Twitter @MercerInsights.