Emily Braeger, i's money reporter, discusses potential reforms to pension schemes. Changes to salary sacrifice and tax relief could alter how millions of people save for retirement, with the government facing financial pressures to make adjustments to public finances. Experts weigh in on the implications of potential changes, including the impact on high earners and the potential for reduced retirement saving.
is i's money reporter. She reports extensively on pensions among other topics. Emily previously worked at The Daily Express.to new limits on salary sacrifice , millions of savers could see the way they build and access their retirement income altered.
needs to plug a £20bn to £30bn gap in the public finances, according to the Office for Budget Responsibility , but she has downplayed this figure.When workers pay into a pension, the government adds a top-up known as tax relief. This boosts savings by at least 20 per cent, and even more for higher-rate taxpayers on 40 per cent or 45 per cent – making it one of the most valuable incentives for retirement saving. Each year, speculation swirls about a clampdown aimed at making the system less generous for higher earners. Experts say such a move is unlikely this time, but if Reeves does act, she could abolish higher-rate relief or introduce a flat 30 per cent rate, according to Stephen Barber, professor of global affairs at the University of East London.“Indeed, it could be a particular challenge to those in the £100,000 to £125,000 bracket where earners are trapped at a 62 per cent marginal rate. “Removing incentives to contribute to pensions would be more likely to disincentivise work and earnings more than contributing more to the Treasury.”Reeves is reportedly considering a cap of £2,000 a year on pension contributions made through salary sacrifice. Above that amount, employees would pay the full rate of national insurance on contributions. Salary sacrifice allows workers to give up part of their pay in return for an equivalent pension contribution from their employer. This reduces income tax and NI for the employee and cuts the employer’s NI bill.The proposed cap would save the Government around £2bn annually but risks deterring pension saving. Jason Hollands, managing director of Evelyn Partners, said the move will “reduce some of the attractions of saving more into a pension and will mean higher NI costs docked off pay packets for workers affected”. He believes private sector workers would bear the brunt as many private firms offer such arrangements. Hollands explained: “The practical effect on individuals in salary sacrifice schemes who are contributing more than £2,000 to a pension each year will be higher NI bills – as they will no longer be able to mitigate this cost and reduced flexibility, especially for people who typically receive bonuses and might choose to waive these from a pension contribution instead. “For employers, this will be an added cost burden coming on top of the employer’s NI contribution hikes last year that have caused businesses to rethink hiring plans and crushed confidence.”Earlier this year, the Government’s fiscal watchdog estimated that the annual cost of the triple lock will hit £15.5bn by 2030 – three times its original projection. The pledge, introduced in 2011, ensures the state pension rises each year by the highest of inflation, wage growth or 2.5 per cent. The OBR has said it remains “committed” to the policy, but Barber believes it could still come under scrutiny. He said: “One area that would make a big difference to balancing the Chancellor’s Budget now and over the coming years, would be to scrap the triple lock on state pensions. “This would likely be politically explosive. This being the case, those existing on state pensions will start paying tax if allowances remain frozen, providing another political headache.”Although a cut to the amount of tax-free cash you can take from your pension had been widely anticipated, reports now suggest the Government has ruled it out. Still, Hollands warns that “nothing can be completely ruled out”, citing last week’s reversal on planned income tax rises. Currently, savers can take up to 25 per cent of their pension as tax-free cash from age 55, often used to clear debts, buy property or fund major life plans. The previous Conservative government introduced a cap of £268,275 – the equivalent of 25 per cent of a £1,073,100 pension.Experts say even if the Government does not make any changes to this limit, it may be too late for some people.How much your take-home pay would be reduced by if Reeves cuts tax thresholds Hollands said: “These worries fuelled a surge in people taking their tax-free cash earlier than they might have done otherwise, both last year – when no changes were announced – and once again in the run-up to this month’s Budget. “Reports indicate that the Chancellor has decided not to move against tax-free cash after all. That news comes too late for the many people who had acted on the speculation and have cashed in a quarter of their retirement pot in haste and now have no ability to change their mind. “Those who took their money with no particular purpose for the cash in mind and who may be several years away from retirement, will now miss out on the potential for further growth in their pension pots, leaving them worse off in retirement.”SAVING AND BANKING
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