Career moves and pension tax changes create pensions minefield for employees

Pension tax changes, increased flexibility at retirement, and the fact that fewer individuals complete their career with one employer, have conspired to make it difficult for employees to keep track of their overall pension position, according to global professional services company Towers Watson.

Jackie Holmes, senior consultant at Towers Watson, said: “The days of a job for life have long gone. It is now common for someone to change employer several times as their career progresses and by the time they retire, individuals could hold a variety of benefit plans. Amid the increasing complexity of retirement planning, they may well not have the requisite understanding of what their entitlements are, nor be aware of the tax-planning opportunities available. So a sense of growing concern is not surprising.”

A recent Towers Watson survey showed that UK employees are worried about their future financial state, with over half (61%) saying that retirement security has become a more important issue over the last three years, increasing to 84% for employees aged 50 and over.

Jackie Holmes said: “Knowing the issues affecting their retirement planning and how to address these can bring some peace of mind for employees. Individuals need to look at the bigger picture, and understand not only the retirement benefits provided by their current employer but also the retirement benefits they have saved elsewhere.

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“Employers often offer some support to staff regarding their company’s retirement benefits, but employees with complex affairs could benefit greatly from specialist pension advice.”

According to Towers Watson, employees can make significant tax savings by looking not only at the form of benefits they take but also at the timing of when benefits are taken. This is particularly relevant where an individual’s combined pension benefits are projected to exceed the Lifetime Allowance at retirement. Each scheme might treat an excess differently and the timing or order in which benefits are taken could result in a higher or lower tax charge.

Jackie Holmes said: “We have seen many examples of how knowing about the issues and opportunities can help employees optimise their retirement planning decisions and save tax. And it is important to remember that it is often not possible to change strategy once a decision is made. From an employer’s perspective, if employees have a better understanding of their pensions and reduce the distractions associated with personal financial planning worries, it will enable them to focus on business objectives.”