Take your pick – cash now or pension later

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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% 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 pension 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.

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