Fury over ‘disastrous’ £13,000 loss to private pension pots | Personal Finance | Finance
Rachel Reeves says ‘we will turn our attention to pensions’
Private sector workers face a “disastrous” raid on retirement funds in the Budget while their taxes continue to protect high value public sector pensions.
It is rumoured that the Chancellor will change the rules to require employers to pay National Insurance (NI) on their contributions to staff pensions. However, it is feared these employers will attempt to recoup the costs by cutting pension payments in future years.
One calculation estimates this could cost a 30-year-old private sector worker on the average salary, £13,000, or 5 percent, of their eventual pension pot at age 67.
The change could potentially raise £17 billion if NI was employed to pension contributions at the full rate of 13.8 percent, which would be a significant increase in costs for all employers, both in the private and public sectors.
However, it is understood that Rachel Reeves is planning to make up any shortfall in budgets that would be caused by the change to pension payments in order to protect key public services, such as the NHS and schools.
The idea that people working the private sector face a blow to their future pension savings, while the public sector will be protected has triggered anger among employers and Labour’s opponents.
Former Pensions Minister Ros Altmann calls the move ‘unjustifiable’ and ‘disastrous’, while financial expert Tom Selby of AJ Bell argued that giving the public sector a ‘get-out-of-jail-free card’ would be difficult to justify.
At the same time, the trade body for the hospitality industry, UKHospitality, argues that making businesses pay NI on staff pension contributions would be a “tax on jobs”, so harming their ability to recruit.
A calculation by This is Money looked at what would happen if an employer scaled back future pension contributions by 10 percent to off-set the cost of the change.
It estimated that a 30-year-old private sector worker, on the UK’s median salary of £35,000, whose employer trimmed pension contributions by 10 percent as a result of extra NI costs could lose £13,000 of their eventual retirement pot at age 67.
The example assumes the employer currently matches employee pension contributions up to 6 percent of salary meaning that £350 a month currently goes into the pot. If contributions rose with inflation and a 5 per cent average annual return was achieved, this could grow to £257,000 by age 67.
But if the employer absorbed some of the NI costs but eased contributions back 10 per cent to claw some back then £332 would go into the pot each month and at the same growth rate the retirement fund could be worth £244,000 at age 67 – some £13,000 or 5 per cent less.
Baroness Altmann said: “Ending employer NI relief, especially if only for private sector, would be disastrous.
“Damaging private sector workers, and their employers, while forcing them to pay for even better public sector pensions, would be a serious mistake.”
A recent survey found four in ten employers would be likely to cut their contributions to worker pension pots if the Chancellor changes the rules covering the costs.
An informal poll of more than 600 employers found 42 percent of those that currently pay more than the statutory minimum of 3 percent would reduce their contributions.
At the same time, 63 percent also said they would be less likely to raise pension contributions in future if national insurance became payable on them.
The net effect would be to reduce the amount of money going into a worker’s pension pot by hundreds of pounds a year, which could reduce the total amount available on retirement by many thousands of pounds.
Employers said the change could see them make cuts in other employment benefits, such as private health care, in order to cover the costs.
The poll was commissioned by the Association of British Insurers (ABI) and the Reward and Employee Benefits Association (REBA).
The change could potentially raise £17 billion (Image: Getty)
Yvonne Braun, policy director at the ABI, said: “We want to see money flowing into pensions to drive growth and we also want employers to be incentivised to provide good pensions for their workers.
“These changes would have a negative impact on both. They would also mean lower retirement standards in the future at a time when we’re already not saving enough for the long term.”
David Lane, Chief Executive of TPT Retirement Solutions, said: “If the Government adds national insurance to employer pension contributions, it would be unwelcome news for both employers and pension savers.
“Our research found nearly nine in ten (88 percent) working people wanted this Government to do more to help people save for retirement, as 57 percent are worried they are not saving enough in their pension. Instead, this tax could lead to some employers cutting back on contributions if they are paying more than the legal minimum.#
“It could also discourage other firms from being more generous with employee pensions. In turn, this could lead to smaller pension pots which could undermine the Government’s aim of encouraging more pension investment in UK productive assets.”
The Institute for Fiscal Studies (IFS) has argued that requiring employers to pay NI on pension contributions would be “sensible”. It suggested there could be ways to mitigate the cost by charging a lower NI rate on these contributions than the current standard figure of 13.8 percent.
Sir Steve Webb, former Pensions Minister, said applying NI to employer pension contributions would initially affect all employers. But if the Government boosted public service budgets to make up the shortfall, it would only be private sector employers who were out of pocket.
Sir Steve, who is now a partner at LCP, said while workers would not see any change to pay packets, it is likely that, over time, they would get less generous pensions “further widening the gap in quality between public and private sector pensions”.