Forgive me. If you or your children are pension savers, or if you have grandchildren who are not yet on the pension ladder, I am in danger of ruining their Sunday.
So if you’re enjoying a fry-up or even brunch at your local Cote Brasserie (I recommend the smoked salmon and scrambled eggs), grab a quick drink of coffee, take a deep breath, and then (PLEASE) read on.
What I’m about to say is important and has implications for your financial future and that of your loved ones.
Here it goes. I have a fear, a horrible fear, that Chancellor of the Exchequer Rachel Reeves is about to make the biggest political attack on our workplace pensions since 1997, when Gordon Brown launched a devastating £5bn annual tax raid.
If this happens (a pernicious tax on the contributions employers make to our workplace pensions), the consequences will be as dire as Brown’s attack, which led to the demise of most final salary pension plans that “guaranteed “workers a retirement income based on years worked. and your salary upon retirement.
Horrible fear: Is Rachel Reeves about to commit the biggest political attack on our workplace pensions since Gordon Brown in 1997?
The current Chancellor will have become the pension-destroying Brown of 27 years ago.
To cut to the chase, any tax on employer pensions in the Budget will seriously hamper the saving habit in this country.
It will make it more difficult for us, our children and grandchildren to build wealth that we can draw on in the future to get us through retirement.
Overdramatic? Sensationalist? No. With Reeves looking to raise up to £35bn of extra annual tax revenue from his budget this Wednesday week, it’s obvious to all that he has our pensions firmly in his sights (as well as any capital gains made from selling shares ). and the money we intend to leave to our loved ones). So come October 30, our right to receive tax-free cash from our pension is likely to be limited.
We can currently withdraw 25 per cent of our pension fund tax-free, normally from age 55, subject to a limit of £268,275. But Reeves is determined to reduce the limit to £100,000, a move that would disrupt the financial plans of many who had earmarked their tax-free cash for a specific purpose (for example, to pay off a home loan).
There could also be restrictions on how much we can contribute to our pensions each year without losing the momentum of tax relief on contributions. Currently, the annual maximum sits at a generous £60,000.
However, as unpleasant as both measures are, especially any monetary limit imposed on tax-free cash, I believe it is the tax on employer pensions that will have much more catastrophic consequences. An insidious tax on par with Brown’s insidious pension tax bomb in 1997.
If Reeves wants to take a risk, he could abolish the National Insurance (NI) exemption that employers enjoy on the contributions they make to their workers’ pensions.
In light of the Government’s desire to raise as much additional tax revenue as possible to meet its extravagant spending plans for the ailing National Health Service (and to fund inflation-busting pay rises for millions of public sector workers ), seems obvious as far as the Chancellor is concerned.
Last month, the Left Resolution Foundation, whose mission is to improve living standards for those on low and middle incomes, described this NI employer exemption on pension contributions as “significant and unnecessary”. Especially, he argues, given that most of the remuneration workers receive – including the contributions they make to their pensions – attracts IN at a rate of 13.8 per cent.
The amount that would be raised with such a measure varies depending on the group of experts heard.
The Resolution Foundation estimates that extending NI to employer pension contributions would provide Reeves with additional annual tax revenue in the region of £12 billion net.
The Institute for Fiscal Studies (IFS) says it would raise £17 billion a year. Like the Resolution, it believes employers are getting too good a deal and calls its NI exemption “generous” and “opaque”.
Although it could be argued whether such tax hoarding violates Labour’s manifesto commitment not to increase rates of income tax, IN and VAT (the Institute for Audit
Studies think so), financial experts believe it is the equivalent of low-hanging fruit for the income-hungry Chancellor.
“There are no easy options for Reeves,” says Tom Selby, director of public policy at wealth manager AJ Bell, “but National Insurance relief on employer pension contributions could be an attractive target for a Chancellor with options.” “limited quantities available”.
As attractive as it may be for the Chancellor, such a measure would be enormously detrimental to businesses, the economy and, of course, savers.
It would increase the cost for employers to provide pensions to workers, which they are legally required to offer under so-called automatic enrollment rules.
The minimum contribution rate under automatic enrollment is eight percent (including tax relief). This is based on a worker’s annual income of between £6,240 and £50,270 and at least three of eight per cent comes from the employer. But many employers, especially large companies, go the extra mile and increase their contributions if a worker contributes more.
Unfortunately, any NI tax on employer pension contributions would force most businesses to look for ways to mitigate this. It could be achieved by keeping tight control on labor costs, for example by being less generous with salary increases or by cutting your workforce.
The Federation of Small Businesses has already warned that adding NI to employers’ pension costs would be a sure way to “further reduce small business employment in 2025”.
But any NI tax will most likely result in many companies reducing their pension generosity to the minimum required under automatic enrollment. For pension savers in their 20s and 30s, this would make it much more difficult to build up a significant pension fund.
Even now, about half of workers don’t save enough for retirement. This percentage will increase significantly if Reeves hits employers with the NI pensions tax.
A few days ago, the Pensions and Lifetime Savings Association published research indicating that the majority of workers believe that the overall minimum contribution for workplace pensions should increase from eight per cent to 12 per cent, and that Employers would pay at least half.
Sadly, if Reeves transforms into Brown on October 30 and launches an NI raid on employer pension contributions, there is little chance of these wishes being granted.
David Lane, chief executive of pensions provider TPT Retirement Solutions, says: “If the Government adds National Insurance to employers’ pension contributions, it would be bad news for employers and pension savers.”
Annoying? No, it will be a disaster comparable to Brown’s 1997 pension tax raid.
- Do you agree or disagree? Email me your thoughts at jeff.prestridge@mailonsunday.co.uk
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