Reeves pension grab would be a ‘tax raid on the private sector’

A tax raid on salary sacrifice schemes will widen the gulf between private and public sector pensions, the chancellor has been warned.

In her budget tomorrow, Rachel Reeves is expected to limit to £2,000 the annual amount that you can save into your pension while still saving on national insurance. The shadow chancellor, Mel Stride, warned today that the move would be “another tax raid on the private sector”.

Most public sector workers get a defined benefit (DB) pension (sometimes called a final salary pension) which gives them a guaranteed, inflation-linked income in retirement. Most will be unaffected by the proposed changes because they do not use salary sacrifice schemes, which allow you to save tax and national insurance on your pension contributions.

Times Money analysis found that some public sector workers are already in line for pensions that pay out more than £11 for every £1 they save. By comparison, private sector workers can expect to get back an average of £5.34 for every pound saved.

Stride said: “Workers in the private sector already have far less generous pension arrangements than most of the public sector. If Labour makes it even harder to save into a pension, that will only widen the gap. It will mean that businesses or workers, or both, have to pay in more for the same pension pot, while those with taxpayer-funded pensions are protected.”

Most private sector workers have defined contribution (DC) pension schemes, where the amount you get in retirement depends on how much is paid in to your pot and how your investments perform. About a third of UK employers offer pensions through salary sacrifice schemes. They allow workers to forgo a portion of their salary that goes directly into their pension to lower their taxable income, so reducing income tax and national insurance contributions. Employers also gain because they do not pay national insurance on the sacrificed portion of salary.

The system has been credited with helping families to avoid cliff edges in the tax system, as well as for encouraging savers to set aside more for their later years.

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The rumoured changes would mean that any contributions above the £2,000 cap will incur the full rate of national insurance — 8 per cent on a salary of less than £50,000 and 2 per cent on income above that.

The deputy leader of the Reform party, Richard Tice, said: “This is another backdoor attack on workers in the private sector, which creates the nation’s wealth and drives the economy. The government is constantly reducing the incentive to save and invest, leading to lower growth.

“Reform is on the side of alarm-clock Britain. We want work to be rewarded and will do everything we can to bring about a change of culture around work, money and success in this country.”

Andrew Tully from the investment platform Nucleus Financial said that changing the scheme would send the wrong message to savers, probably “reducing the retirement savings of many millions of DC savers”.

“Members of public sector DB schemes are much less likely to be affected, widening the already substantial gap between public and private pension provision,” Tully said.

Lisa Picardo from the pensions consolidation firm PensionBee said: “Employees would immediately feel the pinch as they see their take-home pay fall. Employers’ ability to enhance workplace saving in a cost effective way would be affected, making it harder for businesses to encourage long-term pension contributions.”

The widening retirement gap

Doug Mullen from the law firm Anthony Collins said the chancellor’s plans were a backwards step.

“Removing or weakening tax incentives for private employees to save more for their retirement would only make matters worse and would be storing up problems for the future,” he said.

Figures from the investment firm Hargreaves Lansdown showed that 43 per cent of all households were on track for an adequate retirement income compared with 58 per cent of public sector worker households.

Helen Morrissey from Hargreaves Lansdown warned that restricting salary sacrifice would mean that the gap would only get wider and “could cause long-term damage to pension prospects”.

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She said: “It would dilute an important incentive and make savers less likely to increase their contributions beyond the auto-enrolment minimums.”

The Treasury said: “We do not comment on tax speculation outside of fiscal events.”