How the fine-print in the Budget will affect reward
Support for the pensions dashboard
It’s been a difficult 12 months for the pensions dashboard, with secretary of state for work and pensions Esther McVey suggesting earlier in the year that the government might not continue to support the project. But the Red Book shows that £5m has been allocated to the dashboard for next year. It also confirms that there will be a consultation later this year on dashboard design.
What does it mean for reward? The development of dashboards has been constrained by government delays – although pensions minister Guy Opperman remains committed to the project. But in some form or other, dashboards will happen, because they must. Without access to information about all of their pension savings (including the state pension) in a single view, it will be nigh on impossible for employees to understand what they can expect to live on in retirement and make appropriate decisions.
At the Pensions and Lifetime Savings Association Annual Conference in October, Opperman made it clear that he believes in-house schemes and pension providers should already be preparing data for use in dashboards.
Increases in the Lifetime Allowance and Annual Allowance
The pensions lifetime allowance (LTA) has been increased to £1,055,000. This is very slightly more than the £1,054,800 expected, which would have increased the LTA in line with CPI – but the extra is only a rounding-up. The annual allowance remains unchanged at £40,000.
Many campaigners will be disappointed that the Treasury has not addressed pensions tax relief more robustly – as ever, rumours of radical changes swirled ahead of Monday’s announcements, but perhaps more in hope than expectation.
Proposals for broader change have included a flat rate of pensions tax relief of 28%, put forward by the Resolution Foundation. This would help encourage savers to contribute to pensions throughout their working life, rather than risk breaching the LTA later in life.
What does it mean for reward? While the small increase will help those who are close to the LTA, the change won’t make a radical difference and it won’t resolve the reward strategy challenge of how to compensate workers who are already close to or have hit the LTA.
Personal tax thresholds and pensions net pay arrangements
The personal tax-free allowance will increase to £12,500 from £11,850 in April 2019 – a year earlier than expected. In general, this is good news for lower earners who will pay less tax. However, it heightens an anomaly in the way that pensions are taxed.
If pension contributions are taken from employees’ net pay and they earn less than the personal allowance, workers lose pensions tax relief from government (this is termed a ‘net pay arrangement’). The alternative to this is ‘relief at source’. In this arrangement, a 20% tax payment is calculated in payroll before contributions are paid to the scheme. The pension provider then reclaims that 20% from HMRC and invests it in the employee's pension.
What does it mean for reward? There is already pressure from some in the pensions industry to outlaw net pay arrangements. This would protect very low earners and make sure they are not penalised in terms of tax relief. Employers can check with their pension provider if they operate relief at source.
Pensions cold calling ban
Although not part of the Budget itself, the government simultaneously released a response to its pensions cold-calling ban consultation.
What does it mean for reward? The ban could be in place next year. While it’s a good move – and is an important acknowledgement of the increasing risk of pension fraud – it isn’t likely to stop pensions scams by any means.
The government has pledged to work with partners and industry to help raise awareness of cold-calling, but employers can also play a significant role by embedding fraud awareness campaigns into pension communications and financial wellbeing programmes.
