David Robbins, a senior consultant at Willis Towers Watson, said: “Pensions freedom means that over-55s can put money into a pension and take it straight out again, saving themselves tax in the process. There will also be National Insurance savings if savings are channelled through employer contributions.
“The Government was never going to stand for this happening on a large scale, but it was completely silent on the subject when pension freedom was announced and the subsequent £10,000 annual limit looked like a stop-gap. However unsustainable the situation looked, people who have already dipped into a pension pot on the understanding that they would be able to save up to £10,000 a year in future will feel aggrieved that the goalposts have been moved.
“By cutting this limit to £4,000, the Government says it will raise £70 million a year in tax revenue. But the real prize is to limit the money it could lose if people were to start gaming the system in large numbers.
“This change reduces the maximum possible gain to over-55s from ‘washing’ ”income through a pension from around £2,500 per person per year to around £1,000 (for basic rate taxpayers whose employers would be prepared to pass on NIC savings in full). However, the Government is clear that it does not want to see this happening at all. If that sort of behaviour became widespread, a £4,000 limit on contributions probably would not be the end of the matter.”
“The fact that someone has used pension freedom does not stop their employer from having to automatically enrol them into a pension meeting minimum standards. The Government says this won’t be a problem because £4,000 is always less than 8% of ‘qualifying earnings’* – the headline automatic enrolment quality requirement from 2019. However, most large employers pay pension contributions from the first £1 of earnings, and many use a quality test that requires them to pay 9% from 2019. For anyone earning £44,445 or more, 9% contributions will bust the Money Purchase Annual Allowance.
“This might not be the easiest policy to enforce. The onus is on individuals who access one pension flexibly to inform any other pension scheme that they are paying contributions to. Where people fail to do this, they could get a backdated bill for a few years’ worth of Annual Allowance charges.”
“Triple Lock” on Basic State Pension and New State Pension
Philip Hammond said that whether the Government could commit to maintaining the triple lock in next Parliament will be considered at the next Spending Review.
David Robbins said: “It looks as though the Government is preparing to pick the triple lock. Last week the Department for Work and Pensions hinted that everyone born from 6 March 1962 could have to wait an extra year to get their State Pension**, and it seems very likely that something will be done so that existing pensioners are seen to be sharing the pain.
“In 2017/18, the triple lock’s 2.5% underpin adds just 15p a week to pensions compared with the earnings indexation required by law, but even that costs £88 million***.
“The triple lock was always a difficult policy to justify, except with reference to its popularity amongst older voters. It means that pensions rise faster than earnings over the long run – but how much faster will depend on how volatile price inflation and earnings growth are.”
Salary sacrifice
The Autumn Statement confirms that the Government will remove the income tax and employer National Insurance advantages of some benefits-in-kind provided through salary sacrifice.
David Robbins said: “As the Government indicated back in March, employer pension contributions are not affected by the crackdown on salary sacrifice.
“For other benefits, it looks as though the Government is sticking with proposals under which two employees at different firms could end up with identical pay and perks but pay different amounts of tax – more tax would be due if someone had ‘bought’ their benefits through salary sacrifice than if the employer provided them on top of a lower headline salary with no cash alternative.
“If HM Treasury wants to come after National Insurance relief on employer pension contributions at a later date, this provides a template to do it in a way that would only affect the minority of employer pension contributions that originate through salary sacrifice, and which would not affect public sector employees.
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