Targeting pension contributions for additional tax take stamps on the social contract, says James Floyd, managing director of Alltrust Services Limited.
There’s a potential own goal the whole pensions industry will be pleading the chancellor Rachel Reeves not to make in her Budget.
It’s impossible to know with certainty what policies will be unveiled in front of Parliament, but the level of detail in the speculation around a cap on salary sacrifice contributions into pensions suggests the Whitehall number crunchers are at least considering it.
The chilling impact this could have on pension savings, and the pressure it could lump on workers who would need to stay fit enough to work for longer to contribute enough to their nest egg, suggests any notion of a social contract is being entirely disregarded.
At present, workers whose employers offer such a scheme can choose to ‘sacrifice’ some of their salary as a way of boosting their pension contributions, and at present, there are no limits on this.
While the mechanics of how it works might seemingly be negative for Treasury coffers, it’s actually beneficial for the country as a whole.
And that’s the worst thing about this prospective own goal; it will impact workers, employers, and potentially even the government itself.
Unnecessary friction
Because salary sacrifice contributions to pensions come out of gross pay, they are taken before tax is levied.
That means the employee technically gets a lower salary, which reduces the tax take, and employers also pay a lower rate of national insurance on that reduced employee pay.
The government is understood to be considering a £2,000 limit on this allowance, and for anyone who wishes to exceed that will have to pay NI – that’s 8 per cent for those earning below £50,000 and then 2 per cent on earnings above that.
That’s an 8 per cent friction on the ambition of workers who want a comfortable retirement.
We are frequently told that savings rates in the UK are lacklustre compared to our international peers, but such a raid on salary sacrifice pension contributions would only make the situation worse.
Although a slightly oversimplified way to view it, if an average person works for 40 years and has an 8 per cent friction on their ability to save for retirement, they would arguably need to work a fifth longer to reach the same retirement outcome.
Not only is that unfair, but it’s ill-considered economics too.
Harmful step
Actuarial reports released earlier this year reveal nine out of 10 private pension savers are not on track to reach their desired retirement incomes.
What’s more, Legal & General recently concluded that many retirees could empty their pension pot some nine years before they die, once again showing the fragility of our post-work finances.
And the Institute for Fiscal Studies recently stated that major revisions to Office of National Statistics data around pension valuations meant Britain’s household wealth was actually £2.2 trillion lower – 14 per cent of the previous total.
Amid the context of government efforts to get the public to invest more in the stockmarket – which pension saving does – it’s incredibly curious, or indeed outright frustrating, that ministers are eyeing ways to dampen the enthusiasm for saving into pensions.
There will also be a disproportionate impact on the private sector and defined contribution savers.
Revolution required
The Society of Professional Pensions has stated around a third of private sector employees use salary sacrifice for pension contributions, and almost 10 per cent of public sector workers do too.
While government rhetoric might suggest taxing such contributions puts the burden ‘on the broadest shoulders’, many in the pension industry would counteract this.
Data from the ONS shows more than four in every five public sector workers had a defined benefit pension in 2021 against just 7 per cent in the private sector.
That means public sector workers know what they will be paid in retirement, and so probably don’t need to use a salary sacrifice scheme to amplify their pension savings.
But private sector employees – who overwhelmingly do not have guaranteed retirement incomes – will disproportionately need to make those extra contributions due to the potential that their savings pot doesn’t grow at its hoped-for rate.
Rather than dawn raids on pension contributions, what the Treasury should be doing is incentivising economic growth.
If there are more people working, then income tax receipts will be higher; if corporation tax is reduced, entrepreneurs might be more willing and able to launch businesses here; if VAT is decreased, consumers might actually spend more.
Just look at Ireland, where corporation tax is 12.5 per cent and VAT is tiered: The government is predicted to have a €9.7 billion (£8.5 billion) surplus this financial year.
That’s something Westminster could only hope for in its wildest dreams, but targeting pension contributions won’t make that fiscal fairytale come true.
