When the government announced a 26 November Budget date way back in early September, exasperated cries of ‘here-we-go-again’ were heard around the Pensions UK headquarters.
During the months that followed, it seemed like every permutation of pension tax tinkering was run up the flagpole.
Pensions UK joined with the Federation of Small Businesses (FSB), via an open letter, to dissuade the chancellor from putting a £2,000 cap on salary sacrifice. Despite our efforts – earning coverage in the media and supported by most stakeholders – the Treasury went ahead with the policy.
“75% of respondents said they believe savers are likely or very likely to alter retirement contributions or decisions as a result of the Budget changes.”
Dirk Paterson, Pensions UK
A poll of our members ahead of the Budget shows schemes are unsurprisingly concerned: 75% of respondents said they believe savers are likely or very likely to alter retirement contributions or decisions as a result of the changes.
Pension savers have an adequacy problem. More, not less, pension saving is needed if everyone is to have an adequate income in retirement.
The government also has an adequacy problem: it wants pension funds to invest in the infrastructure rebuild it is struggling to afford, while taking money out of the pensions system.
Silver linings from Budget day
But perhaps there is a silver lining, and our efforts were not entirely in vain.
Some of the concerns we’ve raised about salary sacrifice in the run-up to the Budget relate to the stability of the system and the complexity of administering operational changes. Payroll systems need to be adjusted, agreements with employers revisited, and staff resources diverted.
The April 2029 implementation date for the change gives employers plenty of time to prepare.
Companies contributing more to workers’ pensions face bigger tax bill rises than those that are not being so generous. We urge providers to help them consider how they can maintain the generosity of their workplace pension arrangements to lessen the harm to savers’ retirement prospects. Early engagement with employer clients is going to be vital.
And things could have been worse. There was the threat of the removal of the 25% tax-free lump sum, a key incentive to save. That it stays is a relief.
Growth and investment measures
There was also further good news to uncover in the Budget papers once the Chancellor sat down.
The move to reduce the tax charge on released defined benefit (DB) surpluses if they are used to benefit pension members directly is most welcome and a reform we have called for.
Provided that robust safeguards are in place to protect scheme funding and member benefits, enabling trustees to use surplus to improve pension benefits without penalty is undoubtedly good news for savers.
Elsewhere, the new ‘listing relief’ removes the 0.5% Stamp Duty Reserve Tax charge for companies choosing to list in the UK. This will no doubt bring more confidence to the UK equity market.
And, as the industry seeks to fulfil its Mansion House Accord commitment to invest 5% in UK unlisted assets, the announcement of £120bn directed to additional capital investment is significant. New money for roads, rail and energy since the last Budget means there will be a greater array of domestic assets for pension investing. The British Business Bank’s VentureLink initiative is also very welcome.
Pensions UK has long argued for greater fiscal incentives and an improved pipeline to encourage schemes to invest in productive assets to help grow the UK economy. These steps are all in the right direction.
Pre-97 indexation welcomed
The decision to link Pension Protection Fund (PPF) compensation to inflation where it was accrued before 1997 is a boost to impacted pensioners. Those older pension entitlements will now rise annually with inflation, protecting thousands of members.
“Pensions UK warns against the cost of [indexation] being applied to DB pension schemes via the PPF levy, should its funding position deteriorate in the future.”
Dirk Paterson, Pensions UK
This is a significant policy change, because increasing pension payments in line with inflation means their real value doesn’t erode over time and addresses fairness concerns for people affected by scheme failures.
The PPF is unquestionably well-capitalised, and we’re reassured that the organisation has said it can fund the move. But Pensions UK warns against the cost of this policy change being applied to DB pension schemes via the PPF levy, should the funding position of the PPF deteriorate in the future.
Income tax on state pension
Pensions UK also welcomes the triple lock uprating, increasing the state pension by 4.8%. Committing to the triple lock in this parliament to ensure pensions saving keeps pace with inflation is especially vital for those who rely on it for their sole income.
The state pension is the backbone of most people’s retirement savings, representing about half of total retirement income. For those on incomes closer to the minimum Retirement Living Standard, it is even more important: 13% of retirees get over 90% of their income from the state pension.
Dirk Paterson is deputy director for external affairs at Pensions UK.