‘Will cause havoc’ warn experts over fears Rachel Reeves will change pension rules in autumn statement
MILLIONS of workers could end up with less money in retirement under new government plans which are being considered.
Experts have warned that Britain will face a “retirement crisis” and it would "cause havoc" if the Chancellor imposes national insurance on employers’ pension contributions in her budget next week.
The move is predicted to raise £15.4 billion, which would help to plug a £40 billion funding gap in the public finances.
Meanwhile, experts suggest that public sector businesses such as National Health Service workers, teachers and government employees could be spared the change.
If these workers were included then it could mean that public sector budgets would need to be significantly cut, which could worsen their service.
It would cost the government millions of pounds to implement this change so only businesses and private-sector workers will feel its impact.
Read more on the Budget
The decision to increase national insurance on employers’ pension contributions could leave millions of workers with lower wages and less generous pensions.
Felicia Hjertman, CEO of investment platform TILLIT, said the decision could worsen Britain’s retirement savings.
“Britain is on the brink of a retirement crisis,” she said.
“Increasing employers' national insurance contributions on private pensions is a step in the wrong direction.”
While Baroness Ros Altman added: "This kind of change would cause havoc for UK pensions and derail the success of auto-enrolment.
"Because of the prevalence of salary sacrifice arrangements in auto enrolment pensions across all employers, and the widespread problems already known in pensions administration due to excessively complex rules, any such sudden significant change in the Budget will create havoc for many employer schemes and would be seriously ill-advised."
How does national insurance work?
Employers currently pay national insurance for most workers earning more than £9,100 a year.
The amount they pay is equivalent to 13.8% of the employees earnings above this figure.
So for an employee earning £30,000 the employer would pay £2,884.20 in national insurance.
Former pensions minister Steve Webb estimates that putting the national insurance rate up by 1% could raise £8 billion a year.
What could it mean for me?
If employers have to pay more tax then their costs will go up, so they would need to save money elsewhere.
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
- Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
They may do this by increasing the price of their products for customers, giving employees smaller pay rises or reducing the amount that they pay into employees’ pensions.
Employers currently have to pay in at least 3% of an employee’s salary into their pension each month.
The employee then pays 5% of their salary in, bringing the total contribution up to 8%.
But some companies offer much more generous packages and may pay in up to 10% of an employees’ salary.
These packages could be cut if the planned changes come into effect.
Sir Steve Webb said: “Changing national insurance contributions could leave hundreds of thousands of people with a poorer retirement.
“People are not saving enough money for their retirement as it is. This could mean even more people are not saving enough.”
Tom Selby, director of public policy at AJ Bell, said only taxing private sector workers would be difficult to explain.
“Applying national insurance to private sector companies while giving the public sector a get-out-of-jail-free card would be more difficult to justify,” he said.
“Particularly given public sector pensions are far more generous than their private sector equivalents.”
How would it affect different schemes?
There are concerns that introducing national insurance on pension contributions could undermine salary sacrifice schemes.
At the moment some employers offer schemes where employees can give up part of their salary, which is then paid directly into their pension, avoiding tax.
If national insurance is applied to an employer’s pension contribution then it could remove the incentive for companies to offer these schemes.
If these schemes were removed then it could mean that employees have to pay tax on their pension contributions, which would reduce the amount they pay into their nest egg.
What else could be announced in the budget?
The Chancellor is expected to freeze income tax thresholds in the Budget, which could drag 1.5 million pensioners into higher tax bands.
The State Pension is expected to rise by 4.1% in April, equivalent to a boost of £473.
A single pensioner would see their income rise from £221.20 to £230.30 a week.
But with income tax thresholds frozen it could mean that many pensioners have to pay tax on the state pension for the first time.
The Chancellor is also believed to be considering whether to make huge changes to inheritance tax in order to raise billions of pounds.
Only about one in 20 estates now attract inheritance tax but it is still known as Britain’s most hated tax.
Rachel Reeves is considering whether to make changes to the exemptions, allowances and reliefs available at the moment.
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For example, the Government could decide to reduce the amount that you can give to a friend or family member before you die.
It could also reduce the seven year rule, which currently allows someone to give away items or money to friends and family tax free so long as they live for seven years afterwards.
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