Hargreaves calls time on salary sacrifice

2014-Budget-Box-George-Osborne-Distanced-700.jpgSalary sacrifice is highly likely to be abolished, taxed or curtailed in some way in this year’s Budget, as part of the Government’s overhaul of pension tax incentives says Hargreaves Lansdown.

But pension Isa is unlikely to be adopted says the firm, although it sees the abolition of tax relief and its replacement with a top-up incentive as only slightly more likely than not.

Hargreaves has published its predictions of the likelihood of the Chancellor adopting the various options open to him, ranking them on a scale of 1 to 10, with 1 being highly unlikely and 10 being highly likely.

Hargreaves sees restrictions to salary sacrifice as the most likely outcome of all, with a reduced annual allowance and a different regime for DB and DC also highly likely. But it sees retrospective abolition of the tax-free lump sum as very unlikely.

Anti-forestalling measures announced on Budget day                                  9

Salary sacrifice is abolished or curtailed                                                     8

Pension simplification reversed and DB given a different regime to DC        7

Annual allowance reduced                                                                         7

Tax relief abolished in favour of a flat rate top-up system (poss 33%)          6

Annual Allowance Taper abolished                                                             6

Tax relief abolished in favour of tiered top-up system favouring low paid   5

Lifetime Allowance abolished                                                                    5

Employers lose relief on NI on pension contributions                                  4

Pension Isa – tax relief abolished and withdrawals tax-free                        2

Tax free lump sum retrospectively abolished                                             1

Do nothing                                                                                     minus 437

Hargreaves Lansdown head of retirement policy Tom McPhail says: “Investors are crying out for a simple, stable pension system which rewards them for doing the right thing and saving for their future. This could be the final big piece of the pensions jigsaw. The pension system is hugely complicated and there is a great deal of money at stake; whether this review is a success for investors or a disaster, will depend on the Chancellor’s courage outweighing his greed.”

“The reform will have to meet three criteria. It will have to save the government money; it will have to incentivise everyone to make adequate provision for their retirement, including higher earners but particularly the millions of ordinary workers who are currently under-saving; it will have to make the system less complicated.

“As to how much the government saves, much less than £4 billion a year will seem like a wasted opportunity when judged against a pension tax relief bill of around £34 billion a year; much more than £8 billion a year may well mean plucking more feathers than the goose can bear.”