It is with relief that we welcome the chancellor’s turnaround, in choosing not to radically change the basis of pension taxation in the Budget on 16 March and in particular not to introduce pensions Isas. However, there are other rabbits that he could pull out from his hat.
At current levels of auto-enrolment contributions (2 per cent of earnings rising to 8 per cent in 2019), an average earner, on £26,500 per annum, might only get 50 per cent and will struggle financially, especially if they haven’t had a chance to buy a house while working. It is therefore a priority to get workers and their employers to put more into their pension funds and for many to start saving.
One of the main barriers is the constant tinkering of pension legislation which is denting the confidence of members and sponsors. From an employer’s perspective, uncertainty over future changes risks drawing them towards just meeting their automatic enrolment obligations. Stability is a key component of trust and nowhere more so than in the context of long-term saving.
There are reasons why pensions might not be off the agenda in next week’s Budget. The chancellor faces the challenge of raising cash and stimulating the economy and the danger is that he will look to draw from pensions. So what could he do in effect?
Firstly, he could scrap salary sacrifice arrangements, which are currently exempt of national insurance (NI) contributions. These have historically played an important role in channelling savings into workplace pension schemes. By levying NI on all pension contributions this could save him £15bn per annum.
Second, he could increase the Isa annual limit, which currently stands at £15,240, and reduce the pensions annual allowance, currently at £40,000, to further align the savings landscape. Arguably, this would equally ease the transition to pensions Isas in future years.
Finally, he might take steps to remove the much loved 25 per cent tax-free lump sum withdrawal at retirement.
Avoiding future generations of impoverished pensioners should remain the highest priority for the government. Further undermining of pensions by any of the available options would cause many to abandon pension savings totally.