In this year’s Autumn Statement, the Chancellor, Jeremy Hunt, announced the steps the Government propose to take to protect lower earners and make pensions more productive for the UK economy.
Pension ‘pot for life’
The Government announced plans to tackle the proliferation of small pension pots that can build up when people change jobs frequently. Currently, every time someone starts a new job they are given a new pension pot, which they and their employer pay into. The Government will consult on a system where instead people will be able to nominate an existing pension pot to be used. This will also include further moves to introduce ‘Collective Defined Contribution’ pension schemes which offer members a more flexible approach to retirement.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“The automatic enrolment of workers into a pension scheme when they join an employer has worked well to encourage retirement saving, but the growth of small pension pots was always a concern. The Government’s proposed approach feels like a pragmatic solution, but employers will need to be careful about any extra administrative costs it brings.”
Pension fund consolidation
The Government announced plans to encourage the consolidation of small defined contribution pension funds, with a target for the majority of members who save into a defined contribution scheme to be in an arrangement of £30 billion or more by 2030. The Government also plans to consult on using the PPF as a consolidator to take on small defined benefit pension schemes that want to wind up but might struggle to obtain good value terms from an insurer.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“The Government and the Pensions Regulator have been quite vocal about wanting to consolidate pension schemes, driven by concerns about governance standards in small schemes. This may not be a popular approach for trustees and employers operating small pension schemes because of the likely loss of control that will come with consolidation.”
Encouraging productive finance
The Government announced plans to introduce a growth fund of over £7 billion that pension schemes can use to access productive assets in the UK that might otherwise be out of reach. Local Government Pension Funds will also work together to pool their assets, giving them access to broader investment markets, with a target to invest at least 10% of assets in private equity. The Government will similarly look to change the rules for insurers to allow them to invest in more productive UK assets.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“The proposed options for pension scheme investment build on the Chancellor’s recent ‘Mansion House’ speech, where he described plans to encourage pension schemes to invest in a way that benefits UK businesses. This brings potential economic benefits, but many pension scheme trustees will not welcome what might be seen as political interference in their freedom to invest for the benefit of scheme members.”
Reduction in National Insurance contributions
The Government announced plans today to reduce the basic employee rate of National Insurance contributions (affecting approximately 27 million people) from 12% to 10% with effect 6 January 2024. This will help a lot of working families facing pressure from recent high inflation. It will, however, make salary sacrifice arrangements (where employees can make National Insurance savings on certain benefits) a little less attractive for employees.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“Reductions in National Insurance contribution rates will be welcomed by many, especially lower earners who face pressures from recent high inflation. The change indirectly makes saving into a pension less attractive for employees because these contributions are paid before the deduction of tax and National Insurance through an arrangement known as salary sacrifice. This change reduces the National Insurance that employees save by using such a salary sacrifice approach but it is still the most efficient way for employees to pay their pension contributions and there is no impact on the National Insurance saving made by the employer.”
Increase in the National Living Wage
The Government announced an increase in the National Living Wage of 9.8% from April 2024, this means that the National Living Wage will increase to £11.44 an hour, for those aged 21 and over. This is on the back of a 9.7% increase the previous year.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“With the National Living Wage rising, those employers with salary sacrifice arrangements will need to ensure that employees earning the National Living Wage where their salary after salary sacrifice goes below this new threshold are opted out of the salary sacrifice arrangement.”
Pensions triple lock retained
The Government announced that the triple lock will be applied in full to the State Pension in April 2024, giving an 8.5% increase. This is despite public sector bonus payments potentially distorting the calculation of increases in national average earnings in the period. Some market commentators had been expecting the Government to adjust the calculation in some way to allow for this.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“The 8.5% increase in the State pension in April 2024 will come as welcome news to the millions of pensioners in the UK for whom the State pension makes up the majority of their income. There had been speculation that the Government might not apply the triple lock in full because public sector cash bonuses could affect the calculation, but the Government has now decided that is can afford to award the full increase.”
Reduction in tax on pension scheme surplus
The Government announced that the tax charge when an employer receives a refund of a surplus from a pension scheme will be reduced from 35% to 25% from April 2024. The Government will also consult on whether changes to the rules on refunding surpluses might encourage pension schemes to invest in assets with higher expected returns.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“The reduction in the tax charge on surplus refunds will be welcomed by many employers who have seen the funding level of their schemes increase significantly over the last year following the increase in government gilt yields. The aim of encouraging investment in riskier assets will, however, be at odds with the objectives of many pension scheme trustees (and the Pensions Regulator) who want to minimise the risk in their schemes.”
Abolition of the Lifetime Allowance
The Government re-confirmed that the Lifetime Allowance will be abolished from April 2024. This was announced in the 2023 Spring Budget, but there had been speculation that it might be delayed. However, the Government plans to include this in the Autumn Finance Bill 2023.
Simon Hubbard, a Senior Consultant at Quantum Advisory, said:
“The announcement in the 2023 Spring Budget that the Lifetime Allowance would be abolished from April 2024 was met with a warm welcome by the pensions industry. Recently there have been some concerns that this might be delayed, with uncertain consequences given the approaching general election and the Labour government’s opposition to the change. However, despite the complex legislation involved it looks like the change will go ahead as planned.”
