Recent pensions research from Smarterly has found that 96% of companies have had to come up with employee benefit initiatives to deal with higher earners including offering cash alternatives. The need has come about since the 2016 regulation change came into play which means that anyone earning over £150k finds themselves limited in the amount they can contribute to a pension scheme, unless they want to pay a higher tax charge.
Nearly 40% of employers say that the issue of pensions tax relief for their higher earners is now a challenge and they have had to look for other products to support and satisfy the financial needs of their employees. The same research shows that more than half of employers now allow their higher earners to put excess pension contributions into an ISA in a bid to help grow their tax-free savings. Interestingly, less than 3% of employers said that they do not have any employees who are affected, so the impact of the higher tax bracket is far reaching.
The introduction of the tapered annual allowance means that adequate retirement funding for higher earners is unlikely to be satisfied with just pensions and going forward, a retirement fund should consist of a pension supplemented by other savings vehicles. Splitting contributions between a pension fund and an ISA avoids a potential tax charge without the employee losing out on employer pension contributions. It also allows for more accessible retirement funding.
Steve Watson, head of proposition of Smarterly, said: “The fact is that pensions for higher earners can’t be the only source of retirement funding and ultimately income; the introduction of the tapered annual allowance has seen to that. Moving forward, a retirement fund is likely to consist of a pension supplemented by other savings vehicles such as ISAs. The move is inevitable.
“But this dual approach isn’t just for higher earners. Many employers are introducing the approach for all employees to address issues such as poor engagement levels with pensions and a lack of accessible funds.”
The research showed however that there are still some employers who believe that individual tax issues are not for the employer to deal. If an employee decides that they want to restrict their pension contributions to avoid a tax charge, that’s their decision and there is no compensation or alternative offered from the employer for this.
Steve Watson, adds: “From our research, only 4% of employers are not doing anything for their higher earners, so it’s clear that the majority of employers recognise that alternative arrangements have to be in place. The problem for higher earners who aren’t offered alternative arrangements, is that they either accept a tax charge or lose out on employer pension contributions.
“Regardless of how the employer decides to deal with the issue, the message should be the same. A reduced annual allowance is a tax issue not a retirement planning issue. In other words, restricted pension contributions are probably not going to be enough to build up an adequate retirement fund.
Smart employers should consider a dual approach; reduce pension contributions and look for a different product to run alongside creating a much more effective and rewarding retirement funding solution for all levels of employees.”