The Budget has thrown a spanner in the works of those attempting to engineer an expansion of group Sipps. The punitive new tax rules for high earners have all but shut them out of a workplace pension arrangement that was supposed to be all things to all men and women.
Increasing numbers of employers had been signing up to new group Sipp arrangements or rolling existing group Sipp plans from top brass out to their entire workforce. Although top earners have been the first to get access to group Sipp, with share rollover being one of its key attractions, in many situations they may now be the last to use all the functions the plans offer.
“Top earners have had their appetite for group Sipp reduced and that is a frustration,” says Billy Mackay, marketing director at AJ Bell. “Whether decision-makers will now not opt for group Sipp because they no longer benefit from it is an unknown factor, but you would have to be niave to think nobody will react in that way.”
One area where the new rules will cause problems, particularly in the current climate of rising unemployment, is in redundancy payments where they take employees’ income above the £150,000 limit for that tax year.
“People whose redundancy pay takes them over the limit will find their tax relief cut,” says David Trenner, technical director of Intelligent Pensions. “This will be particularly problematic if they were planning to use the money to make lump-sum contributions into their pension.”
But it is the Budget’s effect on senior decision-makers that could have the biggest influence on whether employers continue to move into this market.
Many top earners – whether those making decisions on pension arrangement selection or those who have not – have been attracted to group Sipps because of the ability to pay in maturing share incentive plans and save-as-you-earn holdings in specie into their pensions. Without this facility, and with senior management’s own vested interests disconnected in this way, so the appeal of group Sipps will decline, the doomsayers argue.
Legal & General suggests that such talk of the demise of group Sipps is misplaced, and that share rollover and other contributions remain attractive for high earners. Director of workplace savings Tony Filbin says: “All contributions into a company pension, including share rollover from approved and unapproved share schemes, remain the most tax advantageous way to provide an income for retirement, whether you are a basic-rate taxpayer or a high-rate taxpayer.”
Filbin says group Sipp still presents a fantastic opportunity for employees to save more for retirement and hold shares tax-efficiently, because of the 25 per cent tax-free lump sum, relief from income tax and CGT.
Many would debate whether this is the case if you remain a higher-rate taxpayer in retirement, and alternatives such as Isas, for example the one recently launched through L&G’s corporate offering, will doubtless become increasingly important in benefits packages.
Although the personal engagement of higher earners in group Sipps remains questionable going forward, that is not to say the whole project is flawed. The Sipp brand still has massive traction among the public, and the appeal of offering the same scheme to everybody in the organisation chimes with the need for a new, post-credit crunch veneer of egalitarianism in the workplace. Against a backdrop of boardroom remuneration scandals, offering a group Sipp to all staff can be seen as a progressive move.
“Companies do not want to be seen to be favouring top people with their pensions,” says Jackie Holmes, senior consultant at Watson Wyatt. “Group Sipps also offer employers a way to give staff a wide range of investment choices that meet their ethical and religious requirements. For example, they may not want to design bespoke green or Sharia funds, but they are already available through the group Sipp.
“And it is only a tiny minority of staff that are affected. For the great majority, rolling SIP or SAYE holdings straight into their pensions is great value.”
That said, Holmes points out that the Budget has definitely created issues for some employers considering group Sipp implementation. In many cases, group Sipp has been implemented for top staff first and then rolled out to the rest of the workplace. Some projects are now on pause.
“We have got some clients who are putting off implementation for a while,” she says. “But we have also got clients going ahead, and it is just the people at the very top who won’t be engaged. It is obvious that the objective was to see the fat cats hit. It is just a shame they had to do it in such a way.”
The Budget may have jolted the rise of the group Sipp, but the breadth of features that allow employers to engage staff financially mean its steady growth looks set to continue.