As the government decides to restrict the amount that can be contributed to a pension under salary sacrifice to £2,000 according to the leaked OBR forecast, Helen Morrissey, head of retirement analysis, Hargreaves Lansdown has shared her thoughts.
“Salary sacrifice on pension contributions enables workers to get the full value of every pound through income tax and National Insurance savings. Restricting the amount of someone’s salary that can be sacrificed to £2,000 a year will make people feel that bit poorer and we could see less going into pensions as a result.
As an example, a worker earning £50,000 who saves 5% of their salary would miss out on savings of £40 per year. At a time when the government is looking to improve pension adequacy it seems counter intuitive to do something that could put people off boosting their contributions.
The cost to employers could also be substantial at £75 per year for someone earning £50,000 and £450 for someone earning £100,000. Multiply this across a workforce and the costs mount up quickly. It could lead to employers limiting salary increases or opting against increasing their own contributions beyond auto-enrolment minimums.
It’s a move that could have huge impacts on people’s retirements. A 22-year-old earning £25,000 per year receiving 3% per year as an employer contribution on top of their own 5% one would reach retirement with a pension pot of £226,000. However, if the employer had been able to boost their contribution to 5% the end result would be closer to £283,000.
At a time when there is such a focus on pension adequacy it seems counter intuitive to put barriers in the way to boosting contributions. Given the latest data from the HL Savings and Resilience Barometer shows only 43% of households are on track for an adequate retirement income we’ve clearly got more to do. The ongoing pension adequacy review needs to ensure that the appropriate incentives are in place to help people invest for their future and this change is a backward step.
With the changes not due to come in until April 2029 there’s still time to take advantage of the system as it currently stands to make contributions to your pension under salary sacrifice and take advantage of the National Insurance savings.”
