Thousands of Private Sector Workers Earning Over £40,000 Face £20,101 Pension Loss

Proposals to limit the amount employees can divert to pensions via salary sacrifice schemes could see thousands of private sector workers losing tens of thousands of pounds in retirement savings. Under current rules, workers can contribute up to £60,000 annually to their pensions tax-free through salary sacrifice, a popular method whereby employees give up part of their salary in exchange for benefits such as increased pension contributions.

Labour Party Chancellor Rachel Reeves is expected to introduce a cap of £2,000 per year on salary sacrifice contributions that are exempt from national insurance payments. This change could drastically reduce pension pots, particularly hitting higher earners. For example, a 35-year-old earning £100,000 today could see their pension reduced by nearly £50,000 by retirement. Those earning £75,000 and £50,000 could lose £37,201 and £22,060 respectively, while employees on £40,000 would be £20,101 worse off.

Rachel Vahey from AJ Bell warned that the complexity and reduced benefits of the new rules might lead some employers to abandon salary sacrifice schemes entirely. She also emphasized that there are still alternative ways to contribute to pensions and reduce taxable income without relying solely on salary sacrifice.

David Brooks of financial consultancy Broadstone highlighted the disproportionate impact on private sector workers, noting that salary sacrifice is three times more common in the private sector compared to the public sector. Mike Ambery of Standard Life pointed out that these changes would complicate pension schemes at a time when simplicity is vital to encourage savings.

Zoe Alexander from Pensions UK expressed concern that limiting salary sacrifice would penalize employers who contribute more than the automatic enrolment minimum, ultimately resulting in lower overall retirement savings. Given the growing challenge of inadequate pension incomes, these proposed caps could have far-reaching negative consequences for workers and employers alike.