Out-Law News | 05 Nov 2014 | 5:32 pm | 2 min. read
Half of the employers surveyed by Jelf Employee Benefits said that they could allow workers to redirect salary payments directly into pension savings, with an associated reduction in employment tax liabilities for both employer and employee. Of the 200 employers surveyed, 35% said that they planned to offer this to all employees over the age of 55 while a further 15% said that they were willing to consider doing so on a case by case basis. Only 6% ruled out introducing this option entirely, according to the survey (52-page / 939KB PDF).
Steve Herbert, Jelf's head of benefits strategy, said that the practice could cost the UK Treasury up to £20 billion every year, despite changes to the annual allowance that the government said would limit it.
"It remains to be seen if the rules will be tightened to avoid this practice becoming widespread, and if so how this can be achieved without damaging the concept of freedom of access to pension funds," he said.
From April 2015, the government intends that those aged 55 or over will be able to access their defined contribution (DC) pension savings in whatever form that they wish, without necessarily having to purchase an annuity, subject to their marginal rate of income tax. Journalist John Greenwood has warned that the new rules will create "a huge risk of widespread tax avoidance" if workers aged between 55 and 64 opt to pay all of their salary into a DC pension before withdrawing it as they wish, allowing them to save on income tax and national insurance contributions (NICs) while obtaining tax advantages.
The UK Treasury identified the potential tax loophole as part of its response to the consultation on the new flexibilities, and intends to introduce a £10,000 money purchase annual allowance in order to discourage its use. The new allowance would apply as soon as an individual takes advantage of the new flexibilities, and will limit the amount of tax relief the saver will be able to claim in respect of any further contributions to a DC pension scheme. The overall annual allowance of £40,000 will continue to apply to combined DC and defined benefit (DB) pension savings.
Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, has said that although the new annual allowance would "limit the extent that the loophole can be exploited", it would not act as a "watertight plug". The government has said that it has "taken the view" that this type of salary sacrifice would not result in "a big hit on the Exchequer".
Jelf's research also indicated that the new pension freedoms were of interest to older employees, with 22% of recently retired staff surveyed saying that they would have used the greater access and flexibility had it been available when they retired. The consultancy said that 78% of employers had not yet made their employees aware of the upcoming changes, although 67% of the total said that they were "gearing up" to do so.