Pension contributions hit a record high last tax year – totalling £24.6 billion, according the Office for National Statistics. But with more cash than ever before being saved into workplace and personal pensions, the taxman faced the biggest relief bill on record too, rising to £25.2 billion.
The rise in contributions, and subsequent burden on the State, is due in main to the roll out of auto-enrolment, which last month hit the landmark figure of one million employees signed up to offer workers a pension scheme.
Tom Selby, senior analyst at AJ Bell says that the cost to the taxman may have increased, but the Government has little choice but to take the hit.
“On one hand, an annual bill £25.2 billion and rising could be viewed as increasingly unsustainable. On the other hand, average pension savings levels in the UK remain far too low. Pulling the tax relief rug from under the system now – just as minimum auto-enrolment contributions edge northwards and people get used to the idea of sacrificing some of their hard-earned salary for retirement – would be a huge risk and could potentially undermine the entire reform programme,” he explained.
Beware Future Changes
The growing savings figure equates to good news for future retirees – more cash contributed to pension schemes means a better pension income. But savers should be prepared for the ground to shift beneath them, say experts.
“Incentivising people to save for their future is critical, but with minimum workplace pension contributions increasing in April, there is only so long before the current system gets an overhaul,” warns Nathan Long, Senior Pension Analyst at Hargreaves Lansdown.
There are concerns that the increase in minimum contributions, from a total contribution of 2% to 5% next month, and 8% in April 2018 will lead to many lower-income workers opting out of their workplace pension.
“As the minimum contribution rises to 5% in April, there is a real risk that many will jump off the savings waggon as they see a bigger sum come out of their pay packet,” Samantha Seaton, CEO of Moneyhub commented this week.
And it is not just lower income workers who should be mindful of future changes.
Long adds: “We expect the advantages for higher and additional rate tax payers to be dialled down at some point, so paying as much as you can now could be sensible.”
Jeanette Makings, head of financial education at Close Brothers, calls for any future tinkering to address the sizable portion of the workforce not currently served by auto-enrolment – the self-employed.
“As the number of people opting to work for themselves either for all or part of their careers increases, a focus on supporting retirement savings for this group could drive real impact,” she says.
“Those working for themselves do not have the benefit of employer-arranged financial education, guidance and advice regarding lifetime savings and in particular retirement income. With workplace auto enrolment moving to its next phase in April, the UK retirement savings landscape would benefit from a focus on policy for self-employed as well.”
