High earners opting out of company pensions in record numbers, says TUC

Although some of the 316 senior executives included in the TUC's report received cash payments in addition to formal pension arrangements, many were choosing to take contributions as cash because of the tax rules governing pension scheme contributions, the TUC said (10-page / 109KB PDF). Based on its analysis of the annual reports of FTSE 100 companies, it found that 70% of executives received cash payments in lieu of all or some of their contributions.

Senior executives that opted for a cash payment in lieu of pension contributions received an average of £152,926, or 29% of their salary, according to the TUC's analysis. Total payments in lieu of pension contributions came to over £34 million, it said.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that TUC's analysis showed that "the government's policy of reducing the attractiveness of pensions for high earners by slashing the annual and lifetime allowances appears to be working".

"Pay is being topped up instead; but those top-ups, unlike pension contributions, are taxable," he said.

"However, as the TUC points out, the ultimate consequences may not be quite so rosy for the UK Treasury. If company bosses become disengaged from their own pensions, they are less likely to be interested in the pension arrangements for their staff. Reduced pensions for bosses could eventually lead to reduced pensions for the workforce - and that doesn't tie in with one of the stated aims of the Treasury's consultation on reforming the taxation of pension schemes, namely to incentivise pension saving," he said.

Currently, pension contributions by both individuals and their employers are made free of tax and employer national insurance contributions at the point that they are paid into pension schemes, subject to an annual and lifetime allowance. Any growth in the value of those pension contributions is also free of tax, subject to the lifetime allowance. Pensions in payment are taxed as income, but individuals can take up to 25% of their savings as a tax-free lump sum on retirement.

Both the annual and lifetime allowances have been cut by the Treasury over the last few years. The lifetime allowance has fallen from £1.8 million in April 2006, when it was first introduced, to £1.25m; and will fall again to £1m next April. The annual allowance that can be contributed to a pension free of tax is currently £40,000, but from April will be 'tapered away' by 50p for every £1 that an individual earns over £150,000 to a minimum of £10,000 for those earning over £210,000.

The UK government is also seeking views on more radical changes to pension tax relief, as part of a 'green paper' on pension tax published alongside the Summer Budget. Among the proposals included in the paper is the introduction of a 'taxed-exempt-exempt' system, under which pension contributions would be made from taxed income but investment growth and the payment of benefits would be free of tax. Its consultation closes on 30 September.

"One of the aims of reforming the taxation of pension schemes is to ensure that pension saving is sustainable in light of the budget deficit and increased longevity - in other words, current tax advantages should be cut back," said pensions expert Simon Tyler. "The consultation noted that over two thirds of pension tax relief currently goes to higher and additional rate taxpayers. In this light, the Treasury may welcome the TUC report for demonstrating that top executives' pensions are on the wane."

The TUC found that those senior staff that did receive pension contributions from their companies got an average of 34.1% of their salaries, while contributions were more than 50% of salary in some cases. The typical employer contribution for a worker in a defined contribution (DC) occupational pension scheme, such as those used for automatic enrolment, is just 6.1%, according to the TUC.