By Hannah English, Head of DC Corporate Consulting, Hymans Robertson
In this article, we outline our thoughts on two possible changes that could be introduced: the impact these may have on companies offering DC pension arrangements and their savers, and the actions employers should be considering should any of the rumoured changes be introduced.
Changes to salary sacrifice
The government recently published a research study exploring attitudes to salary sacrifice. The research, which was commissioned by the previous government, tested three potential reforms to the salary sacrifice system, all with a view to removing some, or all, of the NI savings currently made available on pay that is sacrificed for pension contributions.
Currently, salary sacrifice is a popular mechanism among employers and employees, primarily because it offers significant NI savings. This financial incentive is a crucial motivator for many firms.
The study found that many employers currently offer salary sacrifice (80% of those interviewed) and that amongst those offering it, most employees readily accept the offer.
The scenarios explored in the research all received unanimous disapproval from employers:
From an employer perspective, this was both due to increased costs, or where employers currently share their NI savings with staff. There were concerns that a change to NI savings may reduce staff’s future retirement savings.
Many also see offering salary sacrifice as a valuable and appreciated arrangement for staff; in some cases, staff had requested this be implemented. Any changes to NI savings may reduce morale amongst such staff members.
The release of the research has prompted questions about whether the government may review this area in the future.
Our view is that any changes are unlikely to be introduced quickly, and we would expect the government to allow sufficient lead time for any necessary admin or payroll adjustments. In the meantime, salary sacrifice continues to offer an efficient way for employers and employees to make pension contributions. Its popularity is clear, and the research suggests that where salary sacrifice hasn’t been adopted, it’s largely due to a lack of understanding of how it works. In the absence of any immediate changes, employers should consider:
Do you and your internal stakeholders fully understand salary sacrifice and the possible benefits it can offer?
If you currently offer salary sacrifice, do you know what your level of NI savings are, and is its usage being maximised?
What do you currently do with the employer NI savings you make through offering salary sacrifice? What impact would losing all or part of that saving have?
Can you better inform employees of the benefits of salary sacrifice if you don’t automatically opt them in?
Reintroduction of the lifetime allowance
The Lifetime Allowance (LTA) was a limit on the amount that an individual could accumulate in pension benefits over their lifetime before incurring an additional tax charge. From 6 April 2016, the LTA was reduced to £1 million, having previously been as high as £1.8 million between 6 April 2010 to 5 April 2012. From 6 April 2018, the LTA increased annually in line with inflation (CPI), reaching £1,073,100 in the 2020/21 tax year. It was then due to be frozen at this level until 2025/26.
However, the 2023 Spring Budget announced the removal of the LTA with its complete removal coming into effect from April 2024 at an estimated cost of about cost about £2.4 billion between April this year and April 2028.
A leaked memo has shown that Deputy Prime Minister Angela Rayner is in favour of bringing back the Lifetime Allowance on pensions, as a way to fund the government’s fiscal black hole.
Should the LTA be reintroduced this could affect the limits on which savers can save efficiently into pensions. Although, if we look back at what has happened when the Lifetime Allowance was cut in the past, the government introduced protections for those who were already over the limit, allowing them to have pensions worth more than the allowance without incurring a penalty. Our view is that it is likely that such protections may be made available again.
In the meantime, saving into pensions continues to offer a tax efficient way for employees to save for retirement, and making knee jerk reactions to avoid a possible reintroduction of the LTA could lead to individuals making decisions that they may later regret. In the absence of any immediate changes, employers should:
Consider the support you provide to those employees who may be close to or at the previous LTA of £1,073,100.
The government may introduce protections for individuals who already have savings of £1.073m. You may consider if/how you can support staff in applying for such protections.
Whilst we recommend that you do not make any changes until the Budget is announced, Companies should start considering now what the possible Budget changes may for you and your staff, so that you can act quickly if needed.
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