Forgive me. If you or your children are pension savers, or you have grandchildren yet to jump on the pension ladder, I am in danger of spoiling your Sunday.
So if you’re enjoying a fry-up or even treating yourself to brunch at your local Cote Brasserie (I recommend the smoked salmon and scrambled eggs), have a quick gulp of coffee, take a deep breath, and then (PLEASE) read on.
What I am about to say is important and has implications for your financial future and that of loved ones.
Here goes. I have a fear, a horrible fear, that Chancellor of the Exchequer Rachel Reeves is about to commit the biggest political attack on our work pensions since 1997 when Gordon Brown launched a devastating £5 billion annual tax raid on them.
Horrible fear: Is Rachel Reeves about to commit the biggest political attack on our work pensions since Gordon Brown in 1997?
If it happens – a pernicious tax on the contributions employers make into our work pensions – the consequences will be as dire as Brown’s assault, which led to the demise of most final salary pension plans that ‘guaranteed’ workers a retirement income based on years worked and their salary at retirement.
The current Chancellor will have morphed into the pension-destroying Brown of 27 years ago.
To cut to the chase, any pension tax on employers in the Budget will seriously stymie the savings habit in this country.
It will make it more difficult for us, our children and grand-children to build wealth which we can draw on in later life to see us through retirement.
Overdramatic? Sensationalist? No. With Reeves now looking to raise up to £35 billion of extra annual tax revenues from her Budget on Wednesday week, it is obvious to all that she has our pensions firmly in her sights (as well as any capital gains made on share sales and the money that we intend to leave to loved ones).
So come October 30, our right to take tax-free cash from our pension is likely to be curbed.
Currently we can withdraw 25 per cent of our pension fund tax-free, usually from age 55, subject to a limit of £268,275. But Reeves is minded to slash the cap to £100,000, a move which would disrupt the financial plans of many who had earmarked their tax-free cash for a specific purpose (for example, to pay off a home loan).
There might also be restrictions on how much we can shovel into our pensions every year without losing the boost of tax relief on contributions. Currently the annual maximum stands at a rather generous £60,000.
It is likely any NI tax would result in many companies paring down their pension generosity to the minimum requirement under auto-enrolment
Yet, unwelcome though both these measures would be, especially any monetary cap put on tax-free cash, it’s the pensions tax on employers that I believe will have far more cataclysmic consequences. An insidious tax to match the insidiousness of Brown’s pensions tax bombshell in 1997.
If Reeves wishes to go for broke, she could abolish the National Insurance (NI) exemption that employers enjoy on the contributions they make into the pension pots of their workers.
In light of the Government’s wish to raise as much extra tax revenue as possible to meet its extravagant spending plans for the ailing National Health Service – and to finance inflation-busting pay rises for millions of public sector workers – it seems like a no brainer as far as the Chancellor is concerned.
Last month, the Left-wing Resolution Foundation, whose mission is to improve living standards of those on low-to-middle incomes, described this employer exemption from NI on pension contributions as ‘significant and unnecessary’.
Especially so, it argues, given most of the remuneration that workers receive – including the contributions they make into their pensions – attracts NI at a rate of 13.8 per cent.
How much such a move would rake in varies according to which think-tank you listen to. The Resolution Foundation estimates that extending NI to employer pension contributions would provide Reeves with extra annual tax revenues in the region of £12 billion net.
Tough: Forcing companies to pay tax on pension contributions may lead them to be less generous – which could make it harder for today’s younger savers to build up a substantial pot
The Institute for Fiscal Studies (IFS) says it would raise £17 billion a year. Like Resolution, it believes employers are getting too good a deal, calling their exemption from NI ‘generous’ and ‘opaque’.
Though you could argue whether such a tax grab breaches Labour’s manifesto pledge not to increase the rates of income tax, NI and VAT (the Institute for Fiscal Studies thinks so), financial experts believe it is the equivalent of low-hanging fruit for the revenue-hungry Chancellor.
‘There are no easy choices for Reeves,’ says Tom Selby, director of public policy at wealth manager AJ Bell, ‘but National Insurance relief on employer pension contributions could be an appealing target for a Chancellor with limited options available.’
Appealing though it might be to the Chancellor, such a move would be hugely damaging to businesses, the economy and, of course, savers.
For employers it would ramp up the cost of providing pensions to workers, which they are legally obliged to offer under so-called auto-enrolment rules.
The minimum contribution rate under auto-enrolment is eight per cent (including tax relief). This is based on a worker’s annual earnings of between £6,240 and £50,270 with at least three of the eight per cent coming from the employer. But many employers, especially big companies, go the extra mile and increase their contributions if a worker chips in more.
Sadly, any NI tax on employer pension contributions would force most companies to look at ways of mitigating this. It could be done by keeping a tight lid on labour costs – for example, being less generous with pay rises or trimming their workforce.
The Federation of Small Businesses has already warned that adding NI to employer pension costs would be one sure way of ‘shrinking small business employment even more in 2025’.
But more likely, any NI tax would result in many companies paring down their pension generosity to the minimum requirement under auto-enrolment. For pension savers in their 20s and 30s, this would make it much harder for them to accumulate a meaningful pension fund.
Even now, about half of workers are not saving enough for their retirement. This percentage will rise significantly if Reeves hits employers with the NI pension tax.
A few days ago, the Pensions And Lifetime Savings Association issued research indicating most workers believe the minimum overall contribution for workplace pensions should rise from eight per cent to 12 per cent – with employers paying at least half.
Sadly, if Reeves morphs into Brown on October 30 and launches an NI raid on employers’ pension contributions, there is little chance of these wishes being met.
David Lane, chief executive of pension provider TPT Retirement Solutions, says: ‘If the Government adds National Insurance to employer pension contributions, it would be unwelcome news for employers and pension savers.’
Unwelcome? No, it’ll be a disaster on a par with Brown’s 1997 pension tax raid.
- Do you agree or disagree? Email me your thoughts at [email protected]
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