The government’s upcoming salary sacrifice pension cap is already starting to affect client saving decisions, according to Alice Sanders, chartered financial planner at Connor Broadley.
‘I have had several conversations with people asking if they should consider front-loading their contributions before the change in April 2029, which is an interesting point,’ Sanders said.
‘But what’s more concerning is that most of the conversations are centred around whether they should reduce or even stop their contributions altogether once the change comes into effect.
‘Yet again, I think the complexity around the detail of the change and what it actually means for employees is confusing, which may result in bad long-term financial decisions.’
The policy is set to apply a £2,000 cap to the amount of pension contribution which can be paid through salary sacrifice while avoiding employee and employer national insurance (NI) contributions. The change will come into force in April 2029.
A freedom of information request from Steve Webb, partner at consultancy LCP, this week found HM Revenue & Customs expect 2.8 million to cut back on pension saving once the cap comes into force so they can avoid extra NI bills.
Sanders noted that the psychological effect of the new policy may be more impactful than the bottom-line calculation.
‘The reality is that for most people the change is likely to be minimal,’ she said.
How much impact it will have is debatable, but the cap will add another layer of complexity to a system already overburdened with red tape, according to Phil Billingham, director at Perceptive Planning.
‘People can argue until they’re blue in the face that someone could take the extra £200 a month and pay into a pension themselves, and it would have the same effect,’ he said. ‘That’s great on paper, and in a spreadsheet that works wonderfully, but people are emotional, and they don’t behave like that.
‘That’s why salary sacrifice and auto-enrolment are so powerful, because they reward good behaviour. Cutting back on that is unhelpful.’
Julian Baker, director at Leeds-based Livesmart Financial Planning, believes that changes are unlikely to make a dent in the long run, even if there is a temporary shake-up.
‘I think the claims have been a little dramatic. At the end of the day, I know that salary sacrifice gives you [the savings] instantly, but people will still save despite the changes,’ Baker said.
‘Are people really going to say, “I’ve reduced my pension savings because I’m not saving 12%, so I therefore won’t save at all?’”
Financial education gap
Several advisers highlighted the knowledge vacuum around NI and salary sacrifice as an opportunity for advisers.
Where pension savings are impacted, those not receiving financial advice will be the worst hit, Baker said.
‘[The most impacted] will possibly be people who aren’t in the advice model somewhere. We have a lot of clients who come to us, having never received financial advice before.
‘People think financial advice is too expensive, but being reactive can cost you more.’
Advisers highlighted the education gap that may exist for company employees as much as clients.
‘[The figure of 2.8 million people projected to reduce their pension contributions] directly points to an education vacuum, and employers need to fill this void with clear and relevant direction to ensure their employees understand the consequences of underfunding their own tax efficient pensions,’ said Joseph Warne, head of employee benefits at Pareto Financial Planning.
