Restrictive tax changes
prompt most FTSE 100 companies to offer cash instead of pensions

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According to a survey of FTSE 100 companies by consultants LCP, 90% have changed their policy on pension provision as they seek to mitigate the effects of the new rules and avoid their employees paying unnecessary tax.

Changes to the UK pensions’ tax regime took effect in April 2016, with the introduction of tighter annual allowances and a further reduction to the lifetime allowance.

Alasdair Mayes, partner at LCP, said: “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. Our survey found that 84% of FTSE 100 companies now offer cash as an alternative to pension to employees concerned about breaching the lifetime or annual allowance.”

One in five FTSE 100 companies are now offering all employees – not just their highest earners – cash as an alternative to pensions as a direct result of the tax changes introduced a year ago.

“This is consistent with our wider experience that the tax regime is hitting more employees than first thought,” said Alasdair Mayes. “It’s no longer limited to the highest earners. What is clear is that changes to the tax system are having a significant impact on behaviour.”

Where cash was provided as an alternative, there were variances between different groups. Executive directors, on average, are offered 20% of basic salary, whereas employees earning under £110,000 per year closer to 10% of basic salary.

Alasdair Mayes said: “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.”

LCP’s survey found that for the FTSE 100 companies where cash was offered as an alternative, 54% of employers had no requirement for any of the contributions to be paid into a registered pension scheme. For the other FTSE 100 employers, 12% required some employee contributions into a registered scheme, 19% required some employer contributions into a registered scheme and 15% required some joint contributions into a registered scheme.

The pension tax changes have prompted many companies to offer guidance to their employees. Most have provided written information while two-thirds also offer seminars or guidance meetings and one quarter are providing videos or tax modeller tools.

Notes to editor

LCP’s FTSE 100 Pensions Tax Survey surveyed FTSE 100 companies in late 2016 and early 2017. The results are based on 32 respondents. Access the findings here