OREANDA-NEWS. July 06, 2015. Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said that pensions tax relief and salary sacrificemay well be targets for the Chancellor of the Exchequer in next Wednesday’s Summer Budget speech.

After changes to pension tax relief in recent Budgets, it seems possible that it could be further restricted, impacting high earners earning ?150,000 or more – with that change coming on top of the already announced reduction to the Lifetime Allowance which affects long-serving pension savers.

Liam Mayne, principal consultant at Aon Hewitt, said:
“If the Chancellor follows the Conservative Party manifesto pledge regarding the Annual Allowance and it is implemented, then, at a high level, those on salaries of ?210,000 or more could see about a third of their pension savings being paid away in annual tax charges each year.

“Where individuals are also hit by the falling Lifetime Allowance, it firmly becomes an issue for their employers who could see up to around two-thirds of their contribution to an employee’s pension benefits being paid away in taxes over the course of the employee’s lifetime.”

Liam Mayne continued:
“If these changes go ahead they will present a real challenge for employers who will have the task of finding ways to keep these individuals engaged in pension savings. This could lead them to consider whether a tax registered pension scheme is still the best place for these individuals to save into.

“Employers may look to wider savings vehicles such as providing corporate ISAs - which benefit from ever increasing savings limits. Alternatively, companies may look to use unregistered pension schemes as a means of providing more tax efficient benefits for these individuals, or they may simply aim to facilitate better ways for individuals to navigate this increasingly complex landscape themselves. This might include facilitating access to online tools, subsidising IFA costs, or providing more information in annual benefits statements to allow regular monitoring against the allowances.”

Salary sacrifice
It has also been suggested that salary sacrifice may be removed. This is a commonly used mechanism that enables employer and employee National Insurance contributions to be reduced where a member agrees to a reduction in salary in return for extra pension benefits. While difficult to implement fairly across pension arrangements, it could bring a significant windfall for the Government.

James Patten, partner at Aon Hewitt said:
“Removing salary sacrifice would increase the cost of pension provision for both employees and the employer, but in practice it may be that it is employees who will feel the brunt of the impact, with employers passing their costs on by other means.

“While it might still be possible for employers to implement salary sacrifice via the backdoor - through making plans non-contributory for members - their appetite to do this may be limited given it will mean contributing to pensions for all employees including those that have no interest in pensions savings.”

James Patten continued:
“However, when it comes to the direct impact on employees, typical pension costs may rise on average by around 0.5% of salaries, although the impact will typically be much higher for lower/middle income earners rather than higher earners. The impact could be felt even more by those currently in contracted-out DB schemes given that employee NI is already rising by around 1% of salaries  when contracting-out ends in April 2016.

“For employers there would also be the option of passing on their cost increases. This might be via win:win solutions like Pension Increase Exchange (PIE) exercises in DB plans. But in other cases it may involve passing the costs onto employees by making further reductions to DB benefits (particularly when combined with the cessation of contracting-out), reducing the following year’s proposed general pay rise, or possibly by postponing any plans they may have had to improve DC arrangements.”