Steve Berridge (pictured) is pensions technical manager at IFGL Pensions
At 12.30PM the Chancellor stood up to give her long awaited budget following a further round of fevered speculation about what cuts she might make to various taxation reliefs and benefits. Again, the pension industry was in the cross-hairs.
In August, I wrote a piece giving my thoughts on the pre-budget speculation which was already feverish even by then and ended with the thought that the old adage, “look before you leap”, had possibly never been more relevant when it comes to the world of pensions.
Today’s budget largely justifies that viewpoint because the chancellor avoided any direct changes to the big ticket benefit and relief items such as the 25% tax-free cash sum, the reliefs available on contributions or a reintroduction as some feared, of the lifetime allowance and charge.
For now, at least, pension members can still receive valuable tax relief of up to 45% on their personal contributions and withdraw up to £268,275 tax-free from their pension pots.
This was all good news, but there was a sting in the tail for employees and employers. In recent years, the frozen personal allowances (now frozen until 2031) have meant an increase in the attractiveness of salary sacrifice arrangements.
This has not gone unnoticed and with a slight dig (and some would say an unwarranted one) at the financial services sector, Rachel Reeves announced a cap of £2,000 on salary sacrifice contributions, beyond which National Insurance will be payable by both employees and employers.
This is certainly a blow to employees who can shield salary increases and yearly bonuses from additional rates of income tax, but also employers already reeling from last year’s increase to 15% on employer national insurance contribution rates. Ironically, some employers were prompted to roll out salary sacrifice schemes only last year to help offset the costs of punishing NI rises.
For employees (working people, the folk who thought they were covered by manifesto pledges) the same individuals most impacted by this announcement are also likely to be the ones most impacted by frozen income tax thresholds. This is because salary sacrifice has to date played a key role in mitigating the impact distortions in the tax system when pay hits key levels (for example where child benefit starts to be removed, or the cliff edge for earners over £100k who lose personal allowances and tax free childcare benefits).
The cap is intended to take effect from 2029, which does allow time for employers to consider the detail of the changes, and to consider what changes to salary sacrifice
schemes (and perhaps wider pay and benefit structures) need to be made in preparation.
Finally, there was also a good news item for victims of pension insolvency. Pensions accrued before 1997 will receive mandatory indexation, a move which the PPF estimates could benefit more than a quarter of a million (256,000).
To conclude, then, it could have been much worse for the pension industry and those who acted cooly and calmly before the budget will, in the main, be feeling a sense of relief tonight.
