Most of the UK’s 100 largest listed companies are offering staff cash in lieu of pension contributions as recent tax changes drive higher earners out of pension saving.
A survey of FTSE 100 companies by LCP, the consultants, found that 84 per cent were offering cash supplements, such as a salary top-up, as an alternative to pension contributions to employees who are worried about breaching the annual or lifetime saving allowances. Some are offering the cash option to all employees, not just the top earners.
“The current tax regime has seen companies reduce how much they put into their employees’ pension schemes for fear of them being hit with significant penalties for breaking the new allowances,” said Alasdair Mayes, a partner with LCP.
“Our survey shows just how sensitive pensions are to changes in the tax regime. Threats to change the tax treatment further will lead to a continued, and rapid, shift to flexible alternatives to pensions. This could have a significant impact on retirement incomes in the decades ahead.”
The current lifetime and annual allowances, which govern how much can be saved into a pension and thus benefit from tax relief, are £1m and £40,000 respectively.
Tax changes that took effect in April 2016 included the introduction of a “tapered” annual allowance, which saw it fall gradually from £40,000 to £10,000 for those with total income of £150,000-£210,000.
At the same time, the lifetime allowance was also cut from £1.25m to £1m. The government said this would make the system of pensions tax relief “fair, sustainable and affordable”.
Savings amounts that go over the new allowances are subject to tax charges. The Treasury says only those with pension savings near or at the £1m cap will be hit by the lifetime allowance cut.
But the LCP survey found that the combined tax changes were having a broader impact beyond “capped out” top earners. Now, one in five FTSE 100 companies are offering all employees — not just their highest earners — the option to take cash instead of pension contributions.
“This is consistent with our wider experience that the tax regime is hitting more employees than first thought,” said Mr Mayes. “It’s no longer limited to the highest earners.”
Steve Webb, former pensions minister and now policy director with Royal London, the insurer, said the survey confirmed that successive changes to pension tax relief were “driving higher earners out of pension saving altogether”.
“This should worry us because these are the same people who make the key decisions about workplace pensions in British industry,” he added. “If they have little or no stake in the quality of the workplace pension offering, this cannot be good for the vast majority of workers for whom a decent pension is essential.”
The LCP survey found that where cash was provided as an alternative, executive directors, on average, were offered 20 per cent of basic salary, whereas employees earning under £110,000 per year were offered closer to 10 per cent.
Membership of workplace pensions as a whole has been significantly boosted by a policy which see eligible workers automatically enrolled into company retirement funds.
But unions warned the growth of cash as an alternative to pension contributions was worrying.
“Ensuring companies put adequate resources in workplace pensions should be a priority,” said Tim Sharp, policy officer with the Trades Union Congress.
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