Employers must act now to prevent salary sacrifice raid

There appears very little doubt that Budget 2016 was about setting up the demise of workplace pension saving as we know it – and taking with it almost £14bn of national insurance contribution (NIC) savings from employers.

Sure, it looks like salary sacrifice and pension tax relief remained largely intact aside from a few rogue uses, but the direction of travel from the chancellor is obvious.

And that could spell trouble as NIC relief has been a lifeline for many organisations across the country.

Some choose to use the savings to reinvest in other employee benefits such as wellbeing schemes, others have directly invested them into the employee’s pension pot.

Cash strapped local authorities have been able to offer pay rises or just make vital services such as home care viable.

And employees have benefited too with an incentive to increase pension saving helping to secure their retirement.

Ignoring experts

All this was clearly and categorically set out by respondents to HM Treasury’s consultation on the future of pension tax relief released on Budget day.

However despite this overwhelming response urging the chancellor not to tinker with tax relief, George Osborne went ahead with the creation of the Lifetime ISA (LISA) regardless. Indeed, it may only be the looming EU referendum that prevented Osborne going the whole hog in one swoop.

Incidentally, the episode reminds me of one of Osborne’s other flagship policies during the coalition government – the Employee Shareholder scheme.

There again, despite unanimous pleas from employers, workplace share scheme trade bodies, lawyers, tax officers and trade unions not to introduce the controversial shares for rights policy, Osborne persisted.

And as a mildly amusing addendum to this, last week Osborne used his Budget to add a revenue-raising cap to the capital gains tax relief available to employee shareholders: a tax increase to a policy introduced to all intents and purposes as a tax cut for those earning sums “significantly above usual employee wages”.

So Osborne has precedence for persisting in the face of unanimous opposition and we should expect this to continue here.

No the LISA is not initially compulsory, no it is not as restricted as pension saving and yes it includes an effective government contribution of 20% of salary.

In fact, it echoes New Zealand’s successful and well appreciated KiwiSaver (which includes a smaller government contribution of up to $521 annually) with its access to funds for a first home purchase.

However, it also attempts to meet a savings gap that was already filled: the Help to Buy ISA introduced just last year includes a similar government top-up (but will now be phased out to accommodate the LISA); pension saving (with its tax relief and employer contributions) has been consistently growing with the success of auto-enrolment; and of course the pre-existing ISAs.

But we should be in no doubt as to Osborne’s ambitions – to replace workplace pension schemes with the LISA.

 

Buried treasure

Why? The glittering £48bn tax relief pot at the end of the pensions rainbow – £14bn of which is as a result of salary sacrifice savings.

According to the latest Office for National Statistics (ONS) figures, reversing the existing system would probably mean HM Treasury losing out on around £13bn of income tax from pensions being paid out. But removing all that tax and national insurance relief could result in a massive £35bn net improvement in the public finances.

Given Osborne’s current squabbles over £4bn of savings from disability benefits and trying to reach a £10bn surplus, that figure looks very tempting indeed.

So while the LISA does have a government contribution, this is capped at £1,000 per year, therefore limiting the potential tax relief liabilities to just £850m per year by 2020-21, according to Treasury estimates.

True this is not an exact science and this analysis takes no account of potential changes in savers’ behaviour, but it does indicate the magnitude of the figures involved and why Osborne is clearly so keen to change the status quo.

 

Employer action

It is often true that actions speak louder than words. There is just a year until the LISA’s introduction and so little time for employers to really make their case that this move would be damaging beyond repeating what has already been said many times over.

Instead, employers should spend that time before the LISA promoting the bonuses of saving into their pension scheme to younger workers; increasing take-up and contributions as much as possible.

If younger employees see the benefits of pension saving over the LISA it is likely the new scheme will not reach the critical mass it will need to become viable as a replacement to the present retirement saving system.

And while this would potentially preserve the existing tax system to the benefit of employers, importantly, it is also the right thing to do for helping staff to achieve the best retirement outcome possible.