Kim North: The looming threats to savings incentives


During my long career I cannot recall a time when pensions were so hotly debated. Pensions are fast becoming a regular feature of political discussion, and even my local MP Jeremy Corbyn (who happens to be the new Labour leader) has waded into the debate.

Corbyn’s view on pensions is that “state provision funded by taxation is by far the fairest way of providing for the long term, and is part of a philosophy that the community as a whole should care for all”.

This is interesting when set against the Government’s open consultation on pension tax relief, which is looking at the best way to strengthen incentives to save for retirement in order to lessen the burden on the state.

What I cannot agree with is recent comments on the pensions market made by senior industry representatives that salary sacrifice should be scrapped. We should incentivise people to save as much as they can for retirement, and salary sacrifice is such an incentive.

Salary sacrifice covers where rights to future cash payouts are given up in return for the employer paying a sum into a pension scheme for the employee’s benefit. The employee gets full tax relief at his top rate of tax on the contribution and both the employer and employee pay lower insurance contributions. This is fairly easy to set up and is a simple approach to the complex problem of how to reduce tax.

Salary sacrifice is a good thing for pension savers as the compound interest effect on the increased pension contributions can be significant. Hargreaves Lansdown agrees, as around 70 per cent of the group pension schemes it has set up have a salary sacrifice option. The only financial planning pitfall to be aware of is for the lower paid, as HMRC rules state that a salary sacrifice arrangement cannot reduce an employee’s cash earnings below the national minimum wage rates.

Threats to salary sacrifice are not the only risk to incentivising saving. The fallout from increased capital adequacy rules for Sipp providers and the European rules governing cash holdings will see a reduced number of providers in the market. We are set to lose many firms which have the expertise to hold property or non-standard investments, thus reducing the options available in terms of providers and assets held.

This is all happening alongside the reduction in the annual allowance and any future upfront tax relief reductions which may make pensions look more like Isas. Pensions morphing into Isas is not the worry for me, but more the reduced tax incentives available.

Corbyn’s vision of taxation being the main way to fund pensions would result in many thousands of pounds needing to be raised through extra taxes.  Fewer people would save properly for their retirement and would end up in the hands of the state, having spent any investments they may have had earlier in their lives.

Kim North is managing director at Technology and Technical