The U.K. government has announced significant increases to the Annual Allowance (AA) and the Money Purchase Annual Allowance (MPAA), and the abolition of the Lifetime Allowance (LTA). The measures are intended to reduce obstacles to continuing retirement provision for higher earners, and thus encourage those individuals who may have “maxed out” their tax-favored pension savings to continue working or to bring retirees back to the workplace.
While abolition of the LTA appears to open the door to unlimited pension savings, the AA will restrict the extent to which pension savings can be made, and those most able to do so are likely to have their AA restricted by the “AA taper”. Plan sponsors who have embedded the LTA into the design of their pension plans, such as capping benefit accrual, may need to act ahead of the abolition of the LTA to ensure that the plan continues to operate as intended and that they do not see a large increase in liabilities through benefits becoming uncapped. Of the U.K. employers surveyed by WTW, 65% compensate senior executives if their benefits are restricted by the AA, usually via additional cash compensation. Some of those individuals may be able to return to registered pension provision.