A budget that will hit retirement saving hard
The cost to employers of paying national insurance at a rate of 15% above a threshold cut from £9,100 to £5,000 will be £25bn, a phenomenal tax rise that puts all other tax takes announced in the budget in the shade. This , combined with a big increase in the minimum wage will lead to higher wage costs and drive down the capacity of employers to make discretionary spending on pension contributions. Rather than put NI on pensions or pension contributions, the Chancellor has bet the house on employers paying more on staff costs – especially on lower earning staff. For those redoing their cashflow forecasts for 2024/5, these increases come in in April 2025 (not far away)
The reduction in the threshold alone is a £625 tax for all staff earning over £9,100. An extra 1.2% on earnings above £9100 will mean on average an increase in employment costs of £615 per worker. With employment costs going through the roof , employers will seek alternatives. Pension Salary Sacrifice will become more popular but so will engaging contractors – paying their own national insurance , typically on a self-employed basis.
Discretionary pension spend will come under pressure, small wonder the Chancellor has held back on introducing the 2017 AE reforms. Their arrival looks a long way away.
While small businesses may have been spared the worst of the increases with the employment allowance doubling to £10,000. this will be of little comfort to the majority of commercial pension providers whose bread and butter is the medium sized employer for whom staff costs are expected to increase by 2.5% pa.
Who will pay? Very few staff think that employer payroll increases will not be passed on
Will the Government realise the full £25m these measures are expected to bring in? The IFS thinks it unlikely. Staff numbers are likely to fall , contractors increase and a rise in self-employment. None of this bodes well for pension adequacy.
The OBR estimate that 75% of the rate increase will be passed on to staff in lower wages (the rest to customers as inflation). I suspect that some of the cost to employers and staff will be mitigated by a further move to “salary exchange” where employee pension contributions are paid by the employer (without a liability to any NIC).
And the increase in the minimum wage will help many into saving. WTW comments
“The National Living Wage for employees aged 21 and over will rise from £11.44 to £12.21 from 1 April. In 2014, an employee on the minimum wage would have had to work over 30 hours per week to be eligible for automatic enrolment into a workplace pension. That is now under 17 hours and will be under 16 hours if the earnings trigger remains frozen in 2025/26.”
A budget which will change the way we spend our pension savings
The government’s decision to include pensions in inheritance tax will hit more than 10,000 estates, according to a consultation document.
The government said that about 231,000 estates would be liable for inheritance tax in 2027-28, of which 10,500 would not previously have faced the levy.
David Goodfellow, head of wealth planning at Canaccord Wealth, said the move was “potentially seismic” but little detail was given on how it would be implemented. This is not
Bad news for the wealth management industry will be good news for annuity and pension providers. If you join a DB pension (Pension SuperHaven) with a dependent’s pension as an option, then the dependent’s pension n is IHT free.
Details of the proposed changes – which will not come in till 2027 are detailed in a consultation released by the Treasury yesterday. It can be found here
Thanks to Mark Ormston for this helpful infographic
One unfortunate group of savers who will be impacted by this are those who transferred out of DB schemes to get the IHT “loophole” (IFS). I am sure this angry gent is not alone in being frustrated
So at age 66 after planning my old age carefully my estate [ partner and childrens future ] will suddenly be liable to £120k IHT from 2027……the current IHT rules were the driving force for my decision to transfer my DB pension to a DC pot when retiring early 7 years ago.
— john harry coleshill (@ColeshillJohn) October 30, 2024
John and those like him , have clearly been considered by HMT who make it plain that this is more than about just tax-raising and is directly targeting the negative impacts of pension freedoms.
Trustees of DB schemes may also consider this statement and ponder whether paying dependent pensions on the primary pensioner’s death might not be more sensible than paying lump-sums.
A budget that spared the tax free lump sum
Like many others I took my lump sum before the budget, nothing happened and I am left with less debt (I paid off most of my mortgage) but less pension (than if I’d drawn my cash as pension). Shucks, I did the prudent thing for me and it turned out to be unnecessary. I am not complaining.
But there will be many people who either couldn’t or who chose not to release tax-free cash under flexi-access and they will be sitting smug – why wouldn’t they?
They should be thankful for small mercies just as I am thankful I had a pot over £400k that might have been impacted.
Cohabiting couples need to consider formalising their relationship to avoid 40% loss of pension provision.
Illiquid investments, how do they pay the tax before benefits can be paid?
The OBR estimate that 75% of the employers’ NI rate increase will be passed on to staff in lower wages (the rest to customers as inflation).
Overall, this seems to have less impact on indices like CPI, where the targets are low.
As well as gaming how Government debt is measured, there seems to me to be some gaming of how inflation indices may be affected (cf. energy cap increases coming in on 1 October, so they don’t impact the September increases used for annual pension increases the following year).
Remember that the big increase in NMW also reduces the headroom for employers who operate pension sacrifices as sacrifices can’t drop below NMW so any excess just reverts to a net pay deduction
Mixed messages here.
We’ve known since 2016, if not earlier, that HMT was concerned about the increase in salary sacrifice schemes offered by employers.
Today the pensions industry says it hopes to see even more salary sacrifice schemes (with increased pension contributions) to offset NI increases otherwise.
We’ll wait and see.
The interaction with the increase in NMW may mean that at least some employers may think enough-is-enough?
The TUC warns as follows:
“The aim [of salary sacrifice] is to reduce national insurance contributions and income tax, but it does need careful consideration.
“A lower salary could potentially affect any calculations based on what the member earns, from mortgages to life insurance, and certain state benefits (such as statutory maternity pay).
“Where salary sacrifice arrangements are proposed the employer should explain clearly how it might affect members and whether or not the employer would pay some or all of the NICs they save into members’ pensionc pots.
“They should also show how salary sacrifice affects take home pay, so that members can decide whether they would really benefit.”
More fees for benefits consultants to weave their spin.
I think the point can be missed on salary sacrifice – its not the problem. The ill it is is seeking to correct is that NIC is levied on gross pay before pension contributions; but pension contributions (especially in the old days under DB) is as we know “deferred pay”. So why on earth should an employee (or employer) pay NIC on deferred pay? Its just silly.
The absurdity of this was brought home to me one night some years ago, chatting to a member of the judiciary who griping that they got nothing for not being able to do salary sacrifice – I’m not sure he understood even when it was explained to him that he had a benefitted from being a member of a non-contributory scheme!!!
That partly may be why HMRC haven’t taxed salary sacrifice.
The JPS 2022 scheme is now a
CARE DB scheme where judicial office members pay a contribution of 4.26% of their pensionable earnings.
Members can choose to pay a lower rate of 3% for the first three years, but this will result in a lower build-up rate (2.42% pa rather than 2.5% pa).
Nice work if you can get it.
Quite.
The DB that is so “unaffordable” for the (private sector) workers, seems to be a birthright for the judiciary (and of course our MPs/ Ministers).
2.5% accrual is just robbery from the public purse.
It’s a huge irony that the private sector wealth creators are barred from DB, yet are expected to pay for it for the Political classes (and the 13million or so public sector workers in DB) and it is not morally, economically or electorally sustainable.
It’s an advance symptom of the demise of many great civilisations when the elite (ie the rule makers) continue to find ways to justify defending a System (usually pension related) to feather their own nests at the expense of that subset (‘ the governed’) they consider to be beneath them. Of course with a Govt of the left, confiscation of private wealth to prop up that System is one of cards played out.
For comparison, the contributions paid by MPs in their CARE DB scheme are 13.75% (for 2.5% annual accrual), 9.75% (for 2% accrual) and 7.75% (for 1.67% accrual).
Ministers seem to pay 11.1% for 1.775% annual accrual, which appears to be marginally less generous than the MPs’ scheme, but it is frankly quite hard to detect from the various Parliamentary online sources what the current rates are, compared with earlier rates and benefits.
Perhaps someone closer to these arrangements could clarify, please?
Yes but it’s 1.775% accrual on £150-£160k….?