In this year’s Spring Budget, the Chancellor, Jeremy Hunt focussed on tax cuts made possible through reported progress in the UK economy and to encourage growth in the next few years.
Where pensions are concerned, the Chancellor reiterated messaging over the last few months from the Mansion House Reforms and Autumn Statement on targeting value for money for pension scheme members and encouraging pension funds to drive further growth in the UK economy.
Reduction in National Insurance contributions
The Government announced plans today to reduce the basic employee rate of National Insurance contributions (affecting approximately 27 million people) from 10% to 8% with effect 6 April 2024; a further decrease from the recent shift on 1 January 2024 from 12% to 10% and the lowest the rate has been set since the early 1980s.
From an employee benefits angle, this will make salary sacrifice arrangements (where employees can make National Insurance savings on certain benefits) a little less attractive for employees.
Simon Hubbard, a Principal Consultant at Quantum Advisory, said:
“Further reductions in National Insurance contribution rates will be welcomed by many. The change, at face value, indirectly makes saving into a pension less attractive for employees where contributions are paid before the deduction of tax and National Insurance through an arrangement known as salary sacrifice. This change reduces the National Insurance that employees save by using such an approach.
“These tax cuts must be viewed alongside the freeze on income tax thresholds until 2027. Given this, we expect that salary sacrifice arrangements will remain the most efficient way for employees to pay their pension contributions and there is no impact on the National Insurance savings made by the employer. Cuts in National Insurance will only benefit income earned through work, so pensioners will not benefit in the same way that employees do.”
Disclosure and value for money for DC Schemes and LGPS arrangements
The Government reiterated planned changes in disclosure requirements for defined contribution (DC) pension funds such that funds will need to publicly state their level of UK investment and compare their performance level against other schemes (at least £10bn in size).
Where it is determined that schemes are providing relatively poor returns for members compared to that provided elsewhere, schemes may not be allowed to take on new members.
There will separately be revised reporting guidance for Local Government Pension Scheme (LGPS) Funds from April 2024 such that a summary of asset allocation, including UK equity investment, as well as providing greater clarity on pooling will need to be disclosed.
Simon Hubbard, a Principal Consultant at Quantum Advisory, said:
“The announcement from the Government will help concentrate DC pension funds on delivering the best returns for members whilst encouraging further investment in the UK economy. We welcome the aim to target good investment returns for every member. Careful consideration will need to be given in the coming months on how to encourage this for DC Schemes whilst allowing funds to invest in long-term growth assets that may be volatile in the short-term.”
Abolition of the Lifetime Allowance
The Lifetime allowance (LTA) is being removed from 6 April 2024 following the Spring Budget announcement last year; a move that is hoped to alleviate pressure on the NHS as well as other industries to prevent early retirements from experienced individuals. HMRC has since referenced that there will continue to be a fixed cap on tax-free cash sums of £268,275 (25% of the current LTA) and a fixed cap of £1,073,100 (the current LTA) on the total tax-free cash sums that can be paid to an individual.
Simon Hubbard, a Principal Consultant at Quantum Advisory, said:
“The abolition of the LTA will as a whole simplify the pensions industry and encourage more to save for retirement and work for longer. It remains to be seen whether this policy will change if there was a new government following the imminent General Election, given the Labour party’s opposition to the abolition of the LTA.”
State Pension
The Government has committed to applying the triple lock to the State Pension for 2024-2025 such that it will increase from £10,600.20 pa to £11,502.40 pa.
Simon Hubbard, a Principal Consultant at Quantum Advisory, said:
“The triple lock guarantee for 2024/25 (which the Labour Party has also committed to retaining) will ease pensioner fears, particularly given the recent years of high inflation. Whilst this news will be welcomed, wider issues remain with the functionality of the State Pension, which is becoming increasingly more expensive in real terms due to current birth / death rates. We expect there will be further discussions around the State Pension following the election.”
Pension ‘Pot for Life’
The Government is continuing to consult on plans to allow individuals to choose one provider to hold their pension pot throughout their life; aiming to improve outcomes for savers as well as convenience of access.
Simon Hubbard, a Principal Consultant at Quantum Advisory, said:
“We look forward to the Government providing further detail on the lifetime provider model they have set out, noting that challenges with economies of scale will need to be carefully managed. This will help people who change jobs frequently or who have multiple jobs at any one time, because under the current system some workers can end up with a large number of small pensions which can be difficult to manage and to keep track of.”
ISAs
The Government announced the launch of a new British ISA which will allow individuals to invest £5,000 tax-free cash per year in UK assets in addition to the current ISA allowance of £20,000. The Government intends this to help the UK economy grow.
About Quantum Advisory
Established in 2000, we are an independent, owner-managed actuarial and employee benefits consultancy that provides straight-talking, no-nonsense advice to employers and pension scheme trustees. We design, maintain and review pension schemes and related employee benefits so that they operate efficiently and effectively. We also help communicate these benefits in a straightforward way so that employees understand their real value.
Simon Hubbard
Principal Consultant
Quantum Advisory