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.
But another high-profile pension change is now on the cards. In a bid to shore up the country’s finances, reports are indicating that Rachel Reeves will make changes to salary sacrifice.
This article isn’t personal advice. Pension and tax rules can change, and benefits depend on your circumstances. If you’re not sure what’s right for you, ask for advice.
Salary sacrifice tax changes
The good news that tax free cash is off the table has been tempered by reports ramping 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 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 (NI). Employers, meanwhile, save the NI 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 NI 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, or last Budget’s rise of NI. There’s every chance employers cut 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.
Higher earners set to be impacted more
The changes to salary sacrifice are set to hit higher earners the hardest, and 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.
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's hoped the ongoing review into pension adequacy can help the 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.
What can you do?
In the meantime, it’s important to make the most of all your pension allowances to build your financial resilience in retirement.
While salary sacrifice changes can impact your contributions through employers, making payments into your pension outside your salary, if you have the money available, can help secure your retirement.
You can still get tax relief on pension contributions up to your annual allowance. This is £60,000 for most people, though it might be less if you’re a high earner, or have already flexibly accessed your pension.
Remember, you must be under age 75 to get tax relief. You’ll also only get tax relief on personal pension contributions up to 100% of your UK earnings, or £3,600 if this is greater (if you’re a low or non-earner).
It’s also important to remember pension carry forward.
This lets you use any unused allowances from the previous three tax years to really turbocharge your pension pot.
If you’ve not made any contributions in recent years, the carry forward rule could mean you can contribute up to £220,000 to your pension.
Remember, you normally need to be at least 55 (57 from 2028) before you can access money in your pension, when up to 25% is usually tax free with the rest taxable.
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