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21 Mar 2022

3 alternatives to a workplace pension for senior leaders and executives

With the lifetime allowance frozen until 2025/26 and the tapered annual allowance restricting contributions to as little as £4,000 a year, it’s clear that for senior leaders and executives, paying into a pension can’t be the only solution for saving for retirement.

They can’t pay more into the pension or they risk a tax charge or losing any fixed protection, or they’re severely limited to how much they can contribute. 

Either way, what do you do about employer pension contributions? After all, this cohort of employees represent the crème de la crème of your skill base and you want to do the right thing by them.

What are the options? 

1. Do nothing

Some employers take the view that an employee’s personal tax position is not their concern. If they can’t have all or some of the employer pension contribution then that’s too bad, they don’t get it.

Apart from leaving a bad taste in an employee’s mouth, this approach sort of goes against the grain. We talk about pension contributions, but in reality what we’re really talking about is retirement funding contributions. It’s simply a matter of language.

Back in 2006 when the lifetime allowance was introduced at £1.5m and the annual allowance was £215k, not many people were affected and nothing much changed. A pension scheme was still for most people the best and sole place for saving for retirement. But leap forward to today and that’s not the case at all – through no fault of their own, some employees can’t benefit from some or all of the employer’s pension contribution. They still need to save for retirement, just not into a pension.

Is it fair that they should lose out?

2. Cash allowance

Other employers agree that it’s no fault of the affected employees, but it’s up to them to sort out an alternative plan. The employer pays any contributions into salary and then it’s over to the employee.

This approach is better than doing nothing, but it’s still not the best.

For one, we all know that cash has a limited lifespan in terms of appreciation levels – regardless of status or earnings. Once I’ve got used to the extra pounds, I’ve forgotten the history and now it’s just part of my salary.

And then it takes a very disciplined person to use the money for its intended purpose – the chances are it doesn’t go towards my retirement plan but rather goes to normal spending. It’s more likely to improve my standard of living today than my retirement.

There are increased national insurance (NI) costs for the employer, but this can be offset before the cash allowance is paid across, so what ends up in my salary is reduced by the additional NI cost.

3. Workplace ISAs

This is probably the option that ticks all the boxes. It’s not cash (although I can access it if I need to), it’s not pension, but it gives me the opportunity to still save for retirement. Just like the cash allowance option, there are increased NI costs for the employer, but, again, the contribution to the ISA can be reduced by this extra cost.

The biggest positive is the employer contribution does not hit an employee’s salary and so is still being used for its intended purpose – it’s just not going into a pension. As the fund builds up, the appreciation levels increase, so there’s still value to the employer. It’s a win-win.

And for senior leaders under the age of 40, there’s the Lifetime ISA which is the second-best thing to a pension. It’s promoted mainly as a savings product for first home buyers, but people forget it can also be used to save for retirement. With a 25% government bonus of up to £1,000 a year, there’s at least some recompense for loss of pensions tax relief.

If the pension or benefits platform allows it, employees can see their ISA savings alongside their pension savings which further adds to the message that it’s for retirement funding.

Our own stats show that once this type of arrangement is put in place, employees tend not to willy-nilly access their pot but leave it to grow. A much ‘safer’ alternative than simply adding it to salary.

The pensions tax regime is not great for higher earners, but like other employees in the business, they need a guiding hand to do the right thing. 

This approach does just that.

Article provided by Cushon

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Cushon is an online savings&investments platform provider, offering holistic workplace savings.

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