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.
The bigger picture
Of course this budget is not just about cuts – it is about growth and the expenditure that the Government has sanctioned on the NHS and education in particular, are an investment in our futures which counter-balance the negative impact on our and our employer’s finances. This is how the Phoenix Group saw the Budget.
Pensions adequacy depends on growth but also on the affordability of saving. This budget promises growth, promotes pensions over wealth but is not going to get us to the 12% savings targets the retirement savings industry desires.
We are being asked to pay to get us out of the current debt and to get services back on track. There are a lot of losers including the criminal justice system , two child benefits and those caught in traps sets by changes to wealth taxes. We will no doubt hear detailed stories from the losers but we need to remember the counterfactual.
If we had not had this budget, we would have continued down a bad road and would have hit a roadblock at some later stage.
This is a bad budget for pension savers and a bad budget for those who have chosen pension wealth over pension income. But overall, because of its implications for long-term growth , it is (for me) the right budget.
And in terms of the choices available to would be pensioners, it puts pensions back at the heart of the argument. Mike Ambery (also of Phoenix) , speaking to the FT, can have the final words (of this blog)…
Mike Ambery, retirement savings director at Standard Life, said the change would result in a “fundamental shift” in how wealthier individuals think about accessing their money in retirement.