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Health warning for pensions in NI rise

The Chancellor&#39s hike in National Insurance contributions may be good news for the NHS but the knock-on effects could mean an unwelcome blow for pension savings.

Many in the industry see a certain irony in the Government&#39s plans to improve a health service that will increase longevity having the consequence of damaging the ability of people to save for their longer and healthy lives.

Axa head of pensions marketing Steve Folkard says: “Through an improved health service, we will have an increasingly aged population but people are not funding for a longer retirement. This Budget does nothing to change that.”

The blanket 1 per cent increase in NI contributions is presenting both employers and employees with an additional burden at a time when the Government is coming under increasing pressure to boost savings for retirement.

The Government&#39s own Budget report voices its concerns over falling contribution levels to pensions, particularly when companies close final-salary schemes in favour of money-purchase arrangements.

The industry fears that NI increases will leave even less scope for companies and staff to save, causing them to turn away from pensions.

Nearly a third of employers with final-salary schemes say they will reduce their contribution levels if their NI burden is increased, according to research from Norwich Union. Around a quarter of employers with stakeholders said the same.

NAPF spokesman Andy Fleming says: “We are very disappointed the Chancellor failed to take the opportunity to give much needed support to the occupational sector. There was nothing to reassure companies with pension schemes or their members and nothing to encourage people with occupational schemes to continue to offer them.”

Folkard says: “This will have a detrimental effect on pensions. This is additional funding employers and employees will have to provide at a time when they are finding funding for pensions difficult.”

Some IFAs and providers, however, are telling employers not to panic and believe there is now a greater incentive to pay in to pensions. As salary-deducted pension contributions are free from NI payments, they can be used to mitigate against the additional costs.

The technique of “salary sacrifice”, where employees forego a salary increase or bonus on the understanding it will be paid in to their pension pot, is now even more attractive.

Scottish Equitable pensions development manager Margaret Craig says: “I hope this is not going to cause too much of a kneejerk reaction where employers fear their costs are going up and it affects their pension contributions. It is now very tax-efficient to pay in to a pension. Salary sacrifice is now even more attractive.”

Hargreaves Lansdown pensions development manager Danny Cox says: “If employers combine their pension provision with staff remuneration, you can come up with a balance and limit the costs.”

He points to the self-employed in particular, who now have a much bigger incentive to pay in to a pension and save paying the increased NI.

Folkard, however, is cautious about the benefits of salary sacrifice because it is not a legal arrangement. This means employees carry the risk of their employer deciding to spend the money saved on salaries elsewhere.

The NI changes do not come into effect until April 2003. The industry is looking at the Pickering, Inland Revenue and Sandler reviews, all due to report in June, as the white knights to save the day for pensions.

Standard Life senior technical manager John Lawson says: “The important news for pensions is going to happen when the Revenue, Pickering and Sandler bring out their reports.

“The change in NI does not come in until April next year, so there is a chance that a real boost for pensions could come before then.”


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