Currently those who earn more than £150,000 per year (1% of the working population) receive higher tax relief from the Government on their pensions contributions but in the Budget in March the chancellor, Alistair Darling, announced it would be cut in 2011 to align it with that of lower earning pension savers.
The standard rate of tax relief is 20% and will apply to all pension savers from April 2011.
The changes announced received Royal Assent yesterday but, according to research from Lane, Clark & Peacock, four out of five FTSE 100 executive directors are in pension arrangements that will be affected. The top rate of income tax is intended to be 50% when the new arrangements apply, so a typical FTSE 100 director would need extra pay of £100,000 a year to offset the extra tax of £50,000.
According to Aon Consulting, the changes represent ‘another nail in the coffin' for occupational pension schemes. Helen Dowsey, principal at Aon Consulting, said: "Many high earners are key decision-makers in private companies, and if they are being disenfranchised from tax-efficient pension provision, they have little incentive to try and maintain their final-salary scheme for the benefit of the other workers."
Mark Jackson, a partner at Lane, Clark and Peacock, said: "Remuneration committees have reached a crossroads on pensions for their executive directors. If they carry straight on, their directors face a new tax, so they need to consider alternative routes such as paying cash instead, no pension at all, or pensions that are not tax-registered with the HMRC.
"Whichever route they take it will be lined with spectators from shareholder groups and the media, so the route needs to be chosen with care."
The Lane, Clark and Peacock research shows pension provision accounts for 15% of an average FTSE 100 director's total remuneration.
Pension tax relief changes affecting top earners could be another 'nail in the coffin' of occupational pension schemes
Changes to pension relief announced in the 2009 Budget could mean a typical director in a FTSE 100 company will have to pay more than 50,000 more per year in tax.
