Pension tax relief changes are forcing employers to rethinking how they reward their higher earners

A third of companies have gone back to the drawing table over how they reward their higher earners, as new restrictions slash the amount people can put into a pension pot tax free.

Research released today by professional services firm PwC found that changes to the annual allowance for higher earners, which are due to come into force in April next year, are proving so problematic that 26 per cent of employers are reviewing the role pensions play for employees of all levels.

From April 2016, the current annual allowance of £40,000 will be reduced on a sliding scale to £10,000 for those with a total taxable income, which includes employment income, employer pension contributions and private taxable income, over £150,000.

However, PwC warns that, as this figure takes into account income from all sources, such as property, the changes could affect people with much lower salaries.

"It is clear from our research that pensions are set to play a much smaller role in the reward packages of higher earners in the future," said Philip Smith, head of defined contribution pensions at PwC. "This could have a knock-on effect for all employees, as a significant proportion of decision makers will be disenfranchised from pension saving.

"Over the long-term this cannot be a good thing."

Smith added that the changes to pensions tax relief, combined with changes to stamp duty making buy-to-let investments a less attractive proposition, meant higher-earners would have to reconsider how they saved for their retirement.

When asked what employers were thinking of offering instead, Smith said: "Most companies are considering offering a cash allowance, due to the smaller role pensions will play for higher earners. Some are also considering introducing alternative saving vehicles, such as corporate ISAs, or wider workforce saving arrangements."

Commenting on the findings to City PM, Adrian Walker, retirement planning manager, Old Mutual Wealth, remarked that those caught by the annual allowance rule change had some big decisions coming their way, adding:

"If an alternative benefit package is offered, what will the tax consequences be of accepting it and what are the investment choices available? Or will continuing full membership of the pension arrangement with the consequential tax charge still be more beneficial? These are very complex matters and if people are unsure what their options are I would recommend seeing a financial adviser as soon as possible."