UK - Companies need to take the lead in managing employees' expectations for death-in-service benefits ahead of pensions simplification, according to Watson Wyatt partner David Cross.
Cross said it was vital for companies to communicate with employees to manage expectations and that the new regime offered major tax advantages for many employees but they would need to be educated to understand the benefits.”
He said: “The new pensions tax laws will profoundly change death-in-service benefits, removing the limits imposed by the Inland Revenue on tax-free lump sums up to the Lifetime Allowance threshold.
“There is discomfort among employers who wish to offer employees the option to increase lump sum death-in-service benefits at the expense of pension.
“But ultimately I believe that we will see employees demanding this approach because it is more tax efficient.”
Cross added that in the medium term it was likely that more and more new employees would be given solely capitalised option choices. For existing employees companies would probably have to maintain the option of a traditional benefit structure.
However, he said the choice to replace some or all of a death-in-service pension with a more tax-efficient lump sum will ultimately be a compelling proposition for many employees.
“The key message for companies is to be proactive and think through what they want to offer employees. Companies need to take the lead and communicate to employees before the workforce starts formulating its own unrealistic demands,” said Cross.-
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