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Tackling pensions for high earners

2 May 2017

Employers who have not adequately addressed the government’s desire to clamp down on the access that high earners have to tax-efficient pension saving should realise that this very distinct trend is most unlikely to reverse anytime soon.

As recently as early 2011 the lifetime allowance for pension investing was £1.8 million and the annual allowance was £255,000. Now they are £1 million and £40,000 respectively.

And, as if that wasn’t enough, since April 2016 individuals with an annual adjusted taxable income of greater than £150,000 (and threshold income of above £110,000) have had their annual allowance reduced by £1 for every £2 of income they have over that limit – up to a maximum of £30,000. Anyone with an annual income of over £210,000 therefore has an annual allowance of only £10,000.

Those who exceed the annual allowance do not benefit from the Income Tax relief normally available on pension contributions, and if an individual’s pension assets exceed the lifetime allowance – when benefits are taken or at age 75 – they are subject to a tax charge of 55% if taken as a lump sum or of 25% if taken as income. 

Such restrictions mean that many high earners are having to look at alternative investments and retirement planning strategies. In some cases this has meant stopping contributions and accrual altogether and focusing on existing pension assets.

In certain cases, however, the best approach will still be to accumulate pension assets, especially if the individual concerned is benefiting from generous employer contributions or is achieving good investment performance. After all, a £1.5 million pension pot that faces a tax charge could well be considered preferable to a £1 million pot on which no additional tax charge is due.

Ideally, employers should be looking at whether they have employees who are likely to be affected by these limits and then deciding what action to take. They could, for example, elect to offer alternatives to pension contributions such as cash allowances – which will be subject to Income Tax at either 45% or 40%.

But identifying affected employees is easier said than done because employers won’t be aware of the total value of an individual’s pension arrangements, whether they have other sources of income in addition to their salary, or whether they have triggered the money purchase annual allowance by flexibly accessing some of their pension benefits.

Furthermore, if changes are made, it may be necessary for contracts of employment and pension scheme rules to be altered, and this could necessitate a consultation period with affected staff.

We work with a large number of employers and have so far found no real consistency of approach. But clients are broadly falling into three categories.    

Some do no more than send out generic communications, leaving employees to make their own decisions while others redesign their pension scheme for high earners with maximum annual contributions of £10,000, sometimes offering cash supplements to make up for any pension shortfalls. A third category provides a combination of the two, giving employees bespoke information and being flexible in their pension arrangements but not going so far as actually redesigning the scheme.

Some in the latter category refer employees to us for personal financial planning advice, which is sometimes funded by the employer and sometimes by the employee.

The starting point when giving such advice is usually to take full advantage of an individual’s maximum pension and ISA allowances. We can then also consider  the full range of alternative investment vehicles which could be used to save for retirement, outside the traditional pension arrangements.

If you would like to find out more about how Chase de Vere can assist you and your high-earning employees find solutions to their ever-decreasing access to tax-efficient pension saving then please do not hesitate to contact Chase de Vere on 0345 300 6256 or complete this simple form and we’ll call you.

The Financial Conduct Authority does not regulate tax advice.