Out-Law News | 24 Dec 2015 | 11:48 am | 2 min. read
Of 130 companies questioned by PwC, the professional services firm, one third were making changes to reward packages for their highest earners while 26% were reviewing their pension arrangements for all employees as a result of planned cuts to the lifetime allowance and annual allowance. PwC also found that changes were "acting as a further catalyst" resulting in the closure of companies' defined benefit (DB) pension schemes.
"It is clear from our research that pensions are set to play a much smaller role in the reward packages of higher earners in the future," said PwC pension expert Philip Smith.
"This could have a knock-on effect for all employees, as a significant proportion of decision makers will be disenfranchised from pension saving. Over the long-term, this cannot be a good thing," he said.
The maximum combined amount that both individuals and their employers can pay into a pension scheme free of tax is subject to both an annual and a lifetime allowance. The lifetime allowance has fallen from £1.8 million in April 2006, when it was first introduced, to £1.25m; and will fall again to £1m next April. The annual allowance is currently £40,000, but from April will be 'tapered away' by 50p for every £1 that an individual earns over £150,000 to a minimum of £10,000 for those earning over £210,000.
The 'income' tests in relation to these thresholds are based on income from all sources, including from property, PwC said. This meant that anyone earning over £90,000 a year could potentially be affected by the changes to the annual allowance in particular. Pension savings that exceed the allowances are subject to a tax charge of up to 55% when members access their benefits.
Commenting when the changes were announced as part of the Budget in March, pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that the new lifetime allowance cap would begin to affect "senior teachers and senior nurses", as well as other professional workers on moderate incomes. It would also "disproportionately" affect those contributing to defined contribution (DC) schemes, due to the differences in the way that pension rights are measured against the tax-free allowance.
Laight's comments were supported by the findings of the PwC survey, which indicated that companies were contemplating changes to both DB and DC schemes as a result of the government's announcements. Half of the companies with DC schemes told PwC that they were discussing whether to offer cash as an alternative to pension contributions to their affected employees, while 42% were considering restricting contributions to prevent their employees breaching the annual allowance.
Pension contributions by both individuals and their employers below the annual and lifetime allowance thresholds are currently made free of tax and employer national insurance contributions, while any growth in the value of those contributions below the lifetime allowance is also tax free. Pensions in payment are taxed as income, but individuals can take up to 25% of their savings as a tax-free lump sum on retirement.
The UK government has proposed more radical changes to pension tax relief. Options in a 'green paper' on pension tax, which was published alongside the Summer Budget, included the introduction of a 'taxed-exempt-exempt' system under which pension contributions would be made from taxed income but investment growth and the payment of benefits would be free of tax. The government is expected to respond to a consultation on the contents of the paper alongside the 2016 Budget.