Published by Nick Griggs on
Rowan Harris contributed to the writing of this blog post
The first budget of a new parliament is the time when a government can take a hard line without worrying about an election on the horizon. The Chancellor is likely to be planning something big, or time-critical, or else he could have waited until the Autumn Statement.
The outlook for pensions isn’t good. There is a very real concern that with pensions discussions having been booted upstairs to the Lords, the government’s strategy could be almost entirely driven by the Treasury.
We already know tax relief on pensions is under the spotlight. The Conservative manifesto proposed tapering the Annual Allowance (the amount someone can save tax-free in a pension over a year) for people earning over £150,000 a year from its current level of £40,000 down to £10,000 for someone earning £210,000 or more.
The pensions industry has, by and large, come out against this policy. Besides its complexity, it is likely to lead to bosses being disengaged with pensions. This would have knock-on effects for ordinary workers. Perhaps the Chancellor will have listened? We think it is time for the Government to take a step back and review the operation of tax relief on pensions as a whole. Indeed, a recent briefing paper from the House of Commons summarising the history of tax relief on pensions may indicate a move in this direction.
The pension freedoms are more than likely to get a mention as one of Osborne’s flagship policies. The intention to allow pensioners who have purchased an annuity to sell that annuity has met with mixed response. Concerns raised centre on the likelihood that a pensioner may get a poor deal, or not be able to judge value for money.
The plans are far enough advanced that they are expected to go ahead. It’s possible that the Chancellor could introduce an advice safeguard, similar to that for transfers from defined benefit schemes. It may be more likely, though, that he will focus on removing barriers to people taking advantage of the flexibilities. The government expects to receive around £575m in 2016/171 as a result of additional tax payments, and higher amounts in the following years.
One thing that could reduce that number is the effect of salary sacrifice. At present, it is possible for an employer to pay part of an employee’s salary through salary sacrifice as a pension contribution. This is a common method of making pension contributions on behalf of employees. An employee aged over 55 could then take that amount immediately as cash, resulting in savings for both employer and employee in national insurance and income tax.
While the topic cropped up during ministers’ discussions of the pension freedoms, they may not have had a clear idea of the possible effect on their revenue projections. The Treasury may now have taken a closer look at this area and, in conjunction with plans to clamp down on tax evasion and avoidance, they may consider salary sacrifice to be a particularly juicy fruit. This could be a difficult cut to make though, with salary sacrifice being in popular use for more benefits than just pensions.
Another option mooted has been to cut employer relief on pension contributions. Michael Johnson, of the Centre for Policy Studies, said this could raise £10bn a year for the government.
If tax relief is to be cut further, and salary sacrifice could soon be a thing of the past, few incentives may remain to contribute to a pension over other forms of saving. Workers may find themselves facing less gentle nudges to get them saving for retirement.
The new pensions minister, Baroness Altmann, has come out in favour of auto-escalation of pension contributions. In a defined contribution scheme, an employee’s default contributions can be increased each time they receive a pay increase – if they still receive an increase in take-home pay, the employee may not notice the difference.
Regardless of whether or not there are any pensions bombshells in Wednesday’s budget, the spending review and Autumn Statement are still to come this year. That means plenty more opportunities for the Chancellor to make his mark on pensions.
For more information or to discuss the issues raised in this blog, please contact Nick Griggs