Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Pension savers up and down the country will breathe a sigh of relief following reports that changes to tax-free cash in the Budget are no longer on the table. It’s been a damaging rumour that has risked undermining long-term planning. People will be grateful that the prospect is no longer looming over them, and they can plan with more certainty.
Retirement saving is a long-term game, and you need a stable approach to give people the confidence to save for their future. However, in recent years we’ve seen enormous change resulting in a complex system that people struggle to navigate and this undermines trust. This can lead to knee-jerk reactions to Budget speculation that people may come to regret.
It is to be hoped the ongoing review into pension adequacy can help government move away from this seasonal speculation that can cause so much damage by putting a footprint in place that ensures this long-term stability is delivered and that the right incentives are in place to help people save for retirement.
Salary sacrifice
However, reports have ramped up that the Chancellor has salary sacrifice firmly in her sights. It’s a move that would spell bad news for employers and employees alike.
Salary sacrifice arrangements are particularly valuable for both employers and employees, because by giving up a portion of their salary for pension contributions, employees get the full value of every pound, saving both income tax and National Insurance. Employers, meanwhile, save the National Insurance that would have been payable on that slice of the salary. It means both will pay the price for any restrictions on salary sacrifice.
Tinkering with the employer National Insurance exemption on pension contributions heaps further pressure on employers at a time when many are already struggling with extra costs such as the increase in minimum wage. There’s every chance we will see them cutting back on potential wage increases in a bid to save costs and future increases to pension contributions could also be put on the back burner, given they would no longer come with the same NI saving.
Restricting the amount of someone’s salary that can be sacrificed, without incurring National Insurance payments, to £2,000 a year will also have an enormous impact. If this happened, a worker earning £45,000 who saves 5% of their salary would have to pay £30 more in National Insurance and their employer £34. At a time when the government is looking to improve pension adequacy it seems counter intuitive to do something that could put people off boosting their contributions.
It’s something that will hit higher earners and could leave them struggling to save enough for a decent retirement income. The latest data from HL’s Savings and Resilience Barometer shows that higher earners are at risk of not saving enough to enable them to sustain their lifestyle in retirement. Only 41.5% of the fifth highest earning households are on track for an adequate retirement income so there is still much to do to boost retirement resilience – barriers should not be put in the way.”
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