UK companies need undertake a major overhaul of their pension schemes now to prepare for proposed changes in tax relief legislation for high earners due to come into effect in April 2011, according to Hymans Robertson, the UK’s leading independent experts in benefits and investments. It believes the end of pension tax relief for employees with a total taxable income of above £130,000 will pose significant challenges to employers who will need to reconfigure employee benefits packages accordingly and begin preparations now.
Commenting, Chris Noon, Partner at Hymans Robertson, said:
“Unfortunately both employees and employers struggle to understand the hideously complex new rules that the Government has put in place. As the government has limited tax relief to 20% on contributions for high earners, many people could face an overall tax rate of as much as 70% on their pension. For many senior employees this make a pension an irrelevant form of retirement saving.
“Subject to any anti-avoidance legislation, alternative savings vehicles that are more tax-efficient do exist for high earners that are not difficult to implement. These include share incentive plans, EFRBS and Sharesave schemes. While the Government is looking to introduce even tougher anti-avoidance legislation from April 2011, employers will still be under pressure to develop the right combination of these tax efficient remuneration methods to be well placed to both retain and attract top talent.”
Hymans Robertson examined the tax efficiency of various retirement strategies for those on higher incomes at various stages in their career in the post-April 2011 climate, as highlighted in Table 1 below. While Share Incentive Plans, EFRBS (offshore) and Sharesave schemes (with corporate ISAs) are the most tax efficient for workers ranging from those who have five to twenty years until retirement, DB and DC pension schemes are by far the least tax efficient for high earners that are subject to 40% tax in retirement.
For high-earners that can structure their financial affairs to only pay the basic rate of income tax, the efficiency of pension improves greatly.
Any future retirement savings strategy needs to take account this complexity.
Chris Noon added:
“The Government’s claim that the tapering approach to limiting tax-relief removes the potential ‘tax cliff’ at £130,000 is misguided. There is a ‘tax cliff’ and, particularly for employees in generous defined benefit schemes, the difference in tax home pay for small changes in gross income could be very large.
“It is also important to ensure that this complex legislation doesn’t threaten employers’ attitudes to towards pension benefits for employees on lower salaries. For these individuals traditional DC and DB pension schemes are still an attractive proposition so it’s vital that employers understand the impact of the new legislation across the entire workforce and can offer a suitably tailored solutions.”
