Limiting salary sacrifice pension arrangements could put “millions of retirements at risk”, according to the Association of British Insurers (ABI).
A poll conducted by the ABI and Opinium Research found that two in five (38%) UK savers would put less into their pension if chancellor Rachel Reeves caps salary sacrifice allowances in this month’s Budget.
“The chancellor must resist short-term tax rises that undermine people’s long-term financial security.”
Yvonne Braun, ABI
The association said this would result in “millions of employees facing a poorer retirement”, and pointed to previous research it had carried out with the Reward and Employee Benefits Association that showed employers would also cut contributions if the government removed national insurance exemptions for pension payments.
The ABI’s report also follows a warning from the Society of Pension Professionals, which last week said scrapping salary sacrifice could also reduce take-home pay for affected staff.
Yvonne Braun, director of policy for long-term savings at the ABI, said: “The chancellor must resist short-term tax rises that undermine people’s long-term financial security. With so many people already retiring without enough savings, we should be encouraging saving, not making it harder.”
Zoe Alexander, executive director of policy and advocacy at Pensions UK, added that limiting salary sacrifice would “hit working people trying to save for a better pension in retirement – including those on lower-than-average earnings for whom every penny counts both in working life and at retirement”.
“The result will be less money flowing into pensions, in the same year the government has set up a Pensions Commission to address adequacy,” Alexander continued. “And employers will be hit too – costs that could be passed on in the form of lower pay rises at a time when the government is trying to stimulate growth.”
Salary sacrifice speculation mounts
Employees can currently save up to £60,000 a year into their pension using salary sacrifice. Neither they nor their employer pays national insurance on these contributions.
However, speculation has mounted in recent weeks that Reeves could seek to cap this. The rumours were sparked by research published by HM Revenue & Customs earlier this year into salary sacrifice arrangements.
Braun said the ABI’s findings were “worrying”, adding: “These findings point to a deeply concerning ‘double whammy’, with almost half of employers saying they’d also lower their contributions if costs rose.
“This isn’t just a problem for lower earners – the government’s own data shows middle and higher earners are most at risk of falling short of an adequate retirement income.
The insurance industry trade body also warned that “a lack of clarity and continued speculation” regarding pensions and taxation were “harming people’s overall confidence” in saving for retirement.
The ABI and Opinium poll found that just a quarter (26%) of adults felt confident about saving for retirement, while nearly half (46%) weren’t confident that the government’s plans would have a positive impact on their retirement.
“The constant speculation about changes to pensions tax is eroding trust in the pensions system and risks making a bad situation worse,” Braun said. “Instead, we need clear, consistent government policy that gives people confidence to plan for the future – so pensions deliver on their core purpose: providing financial security in later life.”
Watch the Budget live at the Pensions Expert Annual Conference
Join Pensions Expert and peers from across the pensions industry at the Pensions Expert Annual Conference on 26 and 27 November, where we will be screening Rachel Reeves’ Budget speech live.
After weeks of feverish speculation, the chancellor will set out her fiscal plans from the dispatch box in the House of Commons on 26 November – but you can watch from the comfort of the Pennyhill Park Hotel over lunch. Register here to attend, and see the rest of the agenda here.
