Budget 2016: Constant changes to regulations are making pensions more difficult to understand for employees.
Ahead of the Chancellor's Budget statement on 16th March, new research from business and financial advisor Grant Thornton UK LLP suggests that changes to pensions tax relief may encourage employers look to reduce the generosity of their contributions, whilst the constant tinkering with the UK's pension regime is having an adverse effect on employees' ability to fully understand the value of pensions.
Based on a survey of over 200 UK senior business executives*, over 40% of respondents suggested they would reduce pensions contributions for employees – assuming it was legally possible to do so – if changes were introduced to make pensions contributions more attractive to employees, but more expensive to employers (e.g. making employer NIC payable). Moreover, over 70% agreed that the constant changes to regulations make pensions difficult to understand for employees.
Chris Faulkner, associate director at Grant Thornton UK LLP, commented: "With many expecting the Chancellor to make an announcement on the future of pensions tax relief in the Budget statement, we're likely to see yet another material change to an already complex system. In a bid to alleviate the cost of pensions tax relief, the Treasury could announce one of several options, including: adopting a flat-rate tax relief for all (estimated at between 25-35%), introducing an Isa-style system, abolishing salary sacrifice, or potentially withdrawing pensions tax relief entirely.
"Our experience, and that of most providers we've spoken with, is that most employees rarely make any decisions about their pensions, leaving it to their employers to determine their current contribution and ultimately, future savings. Our survey therefore suggests that even if the Chancellor announces changes that make pensions more attractive for the majority, for example by introducing a flat rate of tax relief at around 30%, there could be unintended consequences. If pensions were made less attractive for employers, total pension savings could actually fall, with the perverse effect of widening the pensions gap further – compounding the very problem which auto-enrolment was introduced to solve.
"Pension provisions are an important component in facilitating a more vibrant UK economy, where people can afford to retire comfortably and not have to work into well into old age. Whilst you can't argue against the Government's logic in encouraging savings for retirement, the crucial role played by employers in the equation is often overlooked and any moves to disincentivise them from making superior contributions could ultimately limit the impact of schemes."
* Respondents predominantly represented CFOs / financial directors, MD's / CEOs and other senior decision makers at private, public and not-for-profit organisations throughout the UK. The survey was carried out in February 2016