Three-quarters (76 per cent) of U.K. employers offer alternative cash benefits to high earners in lieu of pension contributions, according to a new survey by WTW.
From April 6, 2024, the U.K. government abolished the lifetime allowance from pension tax legislation, limiting the total amount of tax-free cash an individual can receive to a maximum of £268,275, unless they hold a valid lifetime allowance or lump-sum protection. Despite the abolition, the survey found many employers continue to offer high earners the chance to opt out of pension provision altogether.
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“Many employers have stopped short of requiring employees to make pension savings up to their annual allowance before they can benefit from cash alternatives,” said Helen Perrin, head of financial planning U.K. at Towers Watson, in a press release. “However, we are seeing employers engage with previous LTA opt-outs to encourage them to review their options.”
In terms of the alternatives to pensions, the survey found cash is the most popular form, with 91 per cent of respondents offering it as an alternative to defined contribution pension contributions and 72 per cent offering it instead of defined benefit arrangements.
In addition, more than half of these employers said they reduce cash payments to cover the cost of employer National Insurance contributions, a trend that’s more pronounced among DC plan sponsors, with 55 per cent making adjustments, compared to 27 per cent of DB plan sponsors.
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“NICs are payable on any cash top-ups, meaning the cost to the employer of providing cash is higher than an equivalent pension contribution,” said Perrin. “To keep things cost-neutral for employers, more than half of those that 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.”
The survey also found 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).
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