David Pugh, managing partner at employee benefits firm Lemonade Reward, questions the logic behind the chancellor’s plan
The government’s plan to slash the tax-free pension contributions of workers earning £150,000-plus from £40,000 to potentially £10,000 is not only detrimental to top earners in a business; it will impact on the quality of future pension provision for those on lower salaries.
Changes to the tax-free threshold, announced in this summer’s budget, mean the majority of company directors – key decision makers – will either have to reduce their pension contributions to the £10,000 minimum or pull-out from the pension scheme and opt for a cash allowance, if available, or take nothing.
Contributions over the £10k limit may be subject to a 100 per cent tax charge from April 2016 if the employee has built a pension fund in excess of the new Lifetime Allowance cap of £1m (down from £1.8m three years ago). That’s 45 per cent tax when the contribution is paid and a further 55 per cent when it is drawn out in the future.
And don’t fall for the rhetoric about the ‘cap’ affecting only those with ‘adjusted incomes’ of £210,000; it isn’t true. Alongside the basic salary, additional perks such as company pension contributions, bonuses, commissions, even PMI and the company car may be included in the calculation. On top of those, investment income is also included, pushing those who thought they would fall under the radar into the £210k bracket.
Under the new threshold, employees earning £200k will be limited to around 5 per cent as a contribution, whereas prior to this high earners could pay 20 per cent of their salary. Slashing this all-important business perk and removing a key business driver from an employee scheme will invariably have consequences for other workers.
If employers and directors can only contribute the bare minimum and are faced with exorbitant tax penalties if they exceed this, where’s the incentive to improve the pension packages for those on lower salaries? Will better quality schemes revert back to Auto Enrolment levels?
While business leaders may balk at such a suggestion, personal circumstances can impact on wider business decisions. After all, if you don’t have that ‘verve’ for senior management pension provision, how can you have it for others? It’s no surprise to hear directors are considering ‘pulling the rug on employee pensions’.
It was hoped the government would give us a period of stability, yet the Budget brought more complexity. And with a consultation on tax relief and the pension system in the pipeline, it is increasingly difficult for employers and their staff to make long-term decisions.
I agree with the comments of contributors to the IoD’s UK Pensions roundtable; people can only make decisions if they take more financial responsibility, but they can only do this by being better informed which means greater financial education in the workplace.
A Lemonade Reward survey found only 22 per cent of workplaces offered some form of financial education to staff, despite 77 per cent of respondents saying they would take advantage of it if it was offered. Employers have a vital role in helping guide staff through an ever-evolving pension system and maximising the opportunities presented by the latest budget’s changes.
David Pugh is managing partner at Lemonade Reward. He was previously a founding partner of Foster Denovo, a national independent financial advisory firm and has over 20 years experience working with some of the UK’s leading employers and directors.