Chancellor Rachel Reeves is poised to introduce a significant change to pension rules that will disproportionately impact thousands of private sector workers across the UK. The proposed cap on salary sacrifice arrangements could leave many employees facing substantially reduced retirement funds.
The Proposed Salary Sacrifice Cap
Under current regulations, employees can use salary sacrifice schemes to divert up to £60,000 annually into their pension pots tax-free. This arrangement allows workers to exchange part of their salary for non-cash benefits, including employer pension contributions, while reducing their National Insurance liabilities.
However, the Labour government plans to cap the amount that can be sacrificed without incurring National Insurance payments at just £2,000 per year. This dramatic reduction represents one of the most significant pension policy shifts in recent years.
Projected Financial Impact on Workers
Analysis reveals the substantial long-term consequences for workers across different income brackets. A 35-year-old employee earning £100,000 today would see their pension pot reduced by £49,682 by the time they reach 65.
The impact spreads across middle and higher earners: those earning £75,000 would be £37,201 worse off, while someone on £50,000 would lose £22,060. Crucially, workers earning £40,000 or more would face reductions of £20,101 in their retirement savings.
Industry Concerns and Sector Disparities
Financial experts have raised multiple concerns about the proposed changes. Rachel Vahey from AJ Bell warned that employers might scrap their salary sacrifice schemes entirely if the changes add significant complexity and reduce the benefits of offering such arrangements.
David Brooks from Broadstone highlighted the disproportionate effect on private sector employees, noting that salary sacrifice is about three times more prevalent in the private sector compared to the public sector. This means any cap would inevitably hit private sector workers hardest.
Mike Ambery of Standard Life expressed concern about added complexity to private sector pension schemes at a time when simplicity and engagement are crucial for boosting savings levels.
The industry body Pensions UK, represented by Zoe Alexander, emphasised that employers using salary sacrifice typically contribute above the automatic enrolment minimum. Limiting these arrangements could penalise employers trying to support their staff and lead to lower overall savings.
As the government moves forward with these proposals, thousands of private sector workers face the prospect of significantly diminished retirement prospects, raising important questions about pension policy and intergenerational fairness.
