A THIRD of companies are overhauling how they reward their higher earners due to new restrictions on the amount people can pay into their pension tax free a year, according to new PwC research.
PwC’s survey of 130 companies found that the changes to annual and lifetime allowance for higher earners, taking effect from April 2016, are proving a challenge for companies and over a quarter of those surveyed are reviewing the role of pensions for all employees as a result.
The changes will restrict the annual tax-free amount that higher earners can pay into their pension. From April 2016, the current £40,000 annual limit will be reduced to £10,000 for anyone with annual gross income of over £210,000. As the calculation is based on total income – which includes income from other non-employer-related sources, such as property – PwC calculations suggest that anyone earning over £90,000 a year could potentially be affected by the changes.
Catalyst for pensions rethink
The changes are also acting as a further catalyst for companies to close their defined benefit (DB) pension schemes. Three in ten of the companies that have DB schemes are considering closing future accrual for scheme members. more than a third have made the decision to implement cash allowances.
For the companies that have closed to new entrants, but remain open to accrual, half are in discussion to offer cash allowances. Other options include offering flexible accrual to prevent their employees breaching the lower annual allowance.
Philip Smith, head of defined contribution pensions at PwC, said: “The changes to annual and lifetime pensions allowance are forcing companies to re-think how they reward their higher earners. 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.
“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.
“Higher earners will have to fundamentally change how they save for their retirement as their workplace arrangements will change and one of their traditional back-ups, buy-to-let property, will also become a less viable alternative option from next April due to stamp duty changes.”