I have never been the biggest fan of the House of Lords (an unelected second chamber doesn’t sound very twenty first century to me) but I cheered this week when their noble Lords took a closer look at the Pensions Bill and decided a £2,000 salary sacrifice cap, as the Government wants, was a pretty bad idea.
The Lords, who have been reviewing the bill at length, decided £5,000 sounded a lot more reasonable and I agree with them, if a compromise is necessary.
They have sent the bill back to the Commons with plenty of amendments and a request to think again.
Plenty of people agree the Lords including Pensions UK, which represents much of the UK pensions sector.
Personally, as Pensions UK prefers, I would drop the cap completely as it is unnecessary and just another foolhardy measure which will damage pension saving at a time when we want to do everything possible to increase it.
It will now be down to MPs and Government ministers to review the Bill and proposed amendments. In all likelihood they may well try to overturn the salary sacrifice amendment but that could create a headache and possibly, heaven forbid, a pensions rebellion in the Commons. We’ll see.
Let me say I understand why Chancellor Rachel Reeves wants to see a cap. She and the Treasury fear that millions more workers will seize on this modest benefit to push lots more of their earnings into pensions via salary sacrifice and prevent the Treasury from receiving the income tax and National Insurance revenue.
This is a false fear because there is already a natural limit on how much people can put into their pension through salary sacrifice - how much they can afford to save. Very few salaried workers, if any, can afford to put more than a proportion of their earnings into a pension because they have to live. I suspect there is a natural limit of about 10%-15% of salary. Above that and you may be consigning yourself to poverty. Not such a smart idea. Salary sacrifice has its natural limits.
Of more concern is the desire by the Government to cut back on the benefits of pension saving. As we know from numerous pension adequacy reports, many millions of people are not saving enough for retirement. Some just don’t have the spare funds and some are put off by caps and limits on what they can do.
Saving for retirement needs huge encouragement and a long term approach to convince consumers of the benefits. It is a never-ending job of nudging and cajoling but the benefit is that more people in retirement will be able to live a comfortable life and be less reliant on the state. The benefits to UK plc of this approach are incalculable and the long term savings for taxpayers enormous.
We need a better long term approach that encourage as much pension saving as possible and avoids artificial restrictions. The pension tax relief system has worked very well, for example, and should be seen as a winner. Salary sacrifice is an extension of that and needs to stay to provide even more incentive to save.
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Kevin O’Donnell is editor of Financial Planning Today and a journalist with 40 years of experience. This topical comment on the Financial Planning news appears most weeks, usually on Fridays but occasionally other days. Email:
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