Executives could find that the cap doesn't fit
Thursday 05 January 1995
But this may expose them to large future liabilities, which - once they become material - will have to be provided for in the company's report and accounts.
David Atkins, of Monks Partnership, editor of the report, Top Level Pension Practice, said: "From company comments, it is apparent that some have not explored all the possible alternatives before deciding on their policy towards the earnings cap. It is also questionable whether some of the currently evolved policies will be acceptable or sustainable as the number of capped executives and other high-earning employees increases."
For the moment, though, few companies outside the financial sector have more than 10 capped employees. Even in the financial sector, nearly half of companies make no special provisions for earnings-capped executives and more than half make no provisions for life assurance above the cap.
The pensions earnings cap was introduced in the 1989 Finance Act and limited the pensionable earnings that could be used for the calculation of benefits under an approved pension scheme. The idea is that high earners should not be excessively subsidised by less well-paid taxpayers. However, the cap does not apply to those who joined before June 1989.
When introduced, the level was £60,000. But increases in line with the rise in the retail prices index have raised it to the present £76,800. Following the announcement in last November's Budget, it will rise further, to £78,600 from 6 April.
Besides limiting contributions, the cap restricts benefits. For a typical final salary plan, the maximum pension is limited to two-thirds of the earnings cap, a maximum of £52,400 from April. However, executives can also put aside money for their retirement through unapproved schemes, such as those based in offshore tax havens or straightforward savings plans, which would, of course, be subject to normal taxation.
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