DC pension schemes should prepare for the impact of the Labour government’s first Budget, expected on 30 October, which is likely to include both spending cuts and tax increases, according to Hymans Robertson.
The consultancy’s latest paper outlines potential changes a Labour government could introduce to the UK pension system, focusing on their impact on employers offering DC pensions and savers.
It highlights five possible Budget outcomes, including the removal or reduction of National Insurance (NI) savings for employers, which could raise costs. Employers are advised to review whether they can maintain current contribution structures and shared NI savings.
A flat-rate pension tax could also be introduced, with minimal cost impact for employers unless saving behaviours change. But higher earners might seek alternative savings options, such as ISAs, prompting employers to review matched contribution policies.
The paper also makes the case for a possible decrease in the tax-free cash pension allowance. Employer costs might not go up, but investment plans aiming for a 25% cash payout at retirement might need to be modified. There may be protections for people with savings of more than £1.073 million, and companies could have to help employees obtain these protections.
Including pensions in the Inheritance Tax (IHT) regime could increase administrative work, as savers might spend more of their pension pots. Pension administrators could also be responsible for paying IHT on pensions.
Finally, while it is doubtful that pension tax credits on UK investment expenses would rise, according to Hymans, companies should reevaluate their UK fund investments within default schemes.
Hymans Robertson head of DC corporate consulting Hannah English says: “It is crucial that DC pension schemes prepare for the Budget in advance. While we do not recommend that employers make changes before the Budget is announced, we strongly recommend that they start to consider now what the budget may mean for them and their employees. This will enable them to act quickly once the announcement is made on the 30th of October.
“Some of the changes we examine in this paper could have a direct impact on the efficiency of pensions savings. This, coupled with the complex nature of pensions, could result in some savers becoming more susceptible to scams or making illogical pension decisions. As an antidote to this, we advise that firms review and update any communications to their members. They should ensure they are kept up to date in the run up to, and on Budget Day of possible changes – but encouraged not to take knee jerk decisions now in anticipation of a change that could not come.
“We would advise DC schemes to examine whether they could use modelling tools to help savers understand their savings, and how their savings could be affected by policy changes announced in the Budget. This would allow savers to think through what they will do with their pension pots in light of the announcement on the 30th October. As the old saying goes, failing to prepare is preparing to fail – and nowhere is this more pertinent than on Budget Day.”
