UK Pension Shake-Up Could Harm Millions on Modest Incomes, Experts Warn
Labour Party Chancellor Rachel Reeves has confirmed a significant pension tax overhaul, setting a cap of £2,000 on tax-free salary sacrifice pension contributions by the end of the decade. This move, part of broader changes to the salary sacrifice pension regime effective from April 2029, has sparked warnings that millions of individuals on modest incomes could face financial losses.
Beyond Initial Estimates: A Wider Impact
Former Liberal Democrats Pensions Minister Sir Steve Webb has cautioned that the impact may extend far beyond the 3.3 million savers initially identified as affected. According to a new Office for Budget Responsibility (OBR) document, many workers sacrificing less than £2,000 could also lose out, as predicting business reactions remains highly uncertain due to various response channels available to employers and employees.
Steve Webb stated: "Far from ordinary workers being 'protected' from the changes, we could see millions of people on modest incomes losing out as well, further undermining their incentive to save in a pension." He added that there is an urgent need for the Government to clarify the true scale of losses from this policy.
Industry Concerns and Broader Implications
Steve Hitchiner, chair of the Society of Pension Professionals Tax Group, shared insights on the potential consequences. "The decision to restrict salary sacrifice for pensions will result in higher costs to employees and employers, along with less saving in pensions when more saving is needed," he said. Hitchiner noted that the additional revenue raised by the Exchequer will both diminish and remain uncertain, yet he advised that employers and employees should continue using salary sacrifice where possible, as pension saving remains the most effective means of saving for later life.
HMRC estimates indicate that 7.7 million employees currently use salary sacrifice for pension contributions, with 3.3 million of these sacrificing more than £2,000 of salary or bonuses. The cap could disrupt these arrangements, potentially reducing overall pension savings and increasing financial burdens on workers.
Looking Ahead: Uncertainty and Calls for Clarity
The OBR document highlights the uncertainty surrounding how businesses will adapt to these changes, given the flexibility in employer and employee responses. This adds to concerns about the policy's broader economic impact, particularly for those with modest incomes who rely on such arrangements to build retirement security.
As the implementation date approaches, stakeholders are calling for greater transparency and reassessment to mitigate unintended consequences, ensuring that pension reforms do not disproportionately affect vulnerable savers.
