Three-quarters of UK employers offer cash alternatives to pensions for higher-earning employees who are restricted by the annual allowance, according to research from WTW.
Its annual survey of pension taxes found that over half of these employers have reduced the value of these cash payments this year though due to the rise in employer national insurance contributions.
Many of these cash payments were introduced when higher earners were often restricted in pension savings due to the pensions Lifetime Allowance. Although this has now been abolished WTW’s survey found employers continue to offer high earners the chance to opt out of pension provision altogether.
Where employers choose to offer alternatives to pensions, cash is the most popular form, with 91 per cent of these employers offering cash as an alternative to DC contributions and 72 per cent of these employers offering cash instead of DB arrangements.
The trend to reduce these cash payments is more pronounced among DC employers with 55 per cent making adjustments, compared to 27 per cent of DB employers.
The report also found that employers allow maximum flexibility for high earners to increase pension savings through regular contributions and/or bonus sacrifice. This allows high earners to pay up to their personal annual allowance and make use of any carry forward allowances.
Most employers provide some form of support to employees to help them manage their pension contributions and understand their options for saving towards retirement using alternative tax-efficient vehicles. This support ranges from fact sheets (72 per cent ) and webinars (36 per cent) to access to individual guidance (23 per cent) and individual financial advice (11 per cent).
The report found almost nine out of 10 employers (87 per cent) plan to review their death-in-service arrangements in preparation for the upcoming changes to inheritance tax on pension death benefits from April 2027.
WTW head of financial planning UK Helen Perrin says: “Many employers have stopped short of requiring employees to make pension savings up to their annual allowance before they can benefit from cash alternatives.
“However, we are seeing employers engage with previous LTA opt-outs to encourage them to review their options. Employers can leverage the employer-arranged pensions advice exemption to offer the first £500 of pensions guidance or advice tax-free, ensuring that all their employees are well-prepared for the future.”
She adds: “National Insurance Contributions (NICs) are payable on any cash top-ups, meaning the cost to the employer of providing cash is higher than an equivalent pension contribution. To keep things cost neutral for employers, more than half of those who offer cash top-ups offset the extra cost of employer NICs by reducing the cash value. With employer NICs increasing to 15 per cent from April 2025, many employers plan to cut the cash top-up further to allow for this. For example, an employer might offer the choice between a 10 per cent pension contribution or an 8.7 per cent cash allowance from April 2025.”
