David Brooks: A classic case of government departments not joining the dots
Limiting the amount of salary that can be sacrificed through pension contributions without incurring national insurance (NI) payments to £2,000 a year could undermine the progress made on pension reform, the industry says.
Reports this weekend said the chancellor would target pension salary sacrifice arrangements to raise up to £2bn a year and help fill a £30bn gap in public finances.
Broadstone head of policy David Brooks said the proposed £2,000 cap on salary sacrifice was a "classic case of government departments not joining the dots".
He said: "On one hand, the Pension Schemes Bill is packed with positive reforms: fewer schemes, larger asset pools, a unified value-for-money framework, and better support for savers both during the accumulation phase and as they transition into retirement.
"But this salary sacrifice change risks undermining that progress."
Brooks added: "It hits the pension growth phase directly. People will feel poorer and many will reduce their contributions. Inertia might help some stay the course, but others, especially those aiming to save enough for a decent retirement, may scale back. Employers will also feel the pinch.
"Lower earners and those on auto-enrolment minimums may not notice much. But anyone contributing meaningfully, often encouraged by planners and policy alike, will."
Standard Life retirement savings director Mike Ambery said it wasn't surprising the government was reportedly looking at salary sacrifice arrangements as part of a "budget of tough choices" – adding that, unlike changes to pensions tax free cash, the "inner workings of salary sacrifice were poorly understood".
He said: "By limiting the amount of income that can be sacrificed without paying NI, the government will be increasing the cost of pension contributions to both the individual and the company if the level of contributions is maintained. Ultimately, the impact of NI being paid will be felt in employees' pockets with less take home pay and in employers' payrolls with higher costs."
Ambery added: "Of all the changes being floated in relation to pensions, this is one of the least impactful but undoubtedly it still comes at a cost to savers.
"The government is navigating a difficult path while looking to shore up the nation's finances and at the same time running a Pension Commission designed to increase levels of savings. We hope that a rounded view will be taken at the Budget and that the long-term challenge of ensuring people reach later life with sufficient savings will be kept front of mind in the government's thinking."
