Significant changes to pension saving rules announced in the latest Budget could leave some workers at least £20,000 worse off in their retirement pots, according to new analysis.
Chancellor Rachel Reeves revealed plans to cap the amount workers can contribute to their pensions through salary sacrifice arrangements without paying National Insurance contributions.
What's Changing in the Salary Sacrifice Rules?
Under the current system, employees can sacrifice part of their salary or bonus as a pension contribution, reducing their gross pay. Employers then pay the equivalent amount into the worker's pension pot.
This arrangement has provided valuable National Insurance contributions (NICs) savings for both employees and employers. However, from April 2029, the amount exempt from NICs will be capped at £2,000 per year.
The Treasury estimates this move will raise approximately £4.7 billion annually for public finances.
Impact on Retirement Savings
Investment platform AJ Bell has calculated the potential long-term impact on retirement savings for different income levels.
A typical 35-year-old saver earning £40,000 with £30,000 currently in their pension pot could see their final pot reduced by £20,101.
The analysis also reveals that someone on a £50,000 salary would lose out on £22,060, while an employee earning £100,000 could face a substantial £49,682 shortfall in their retirement savings.
Government Justification and Timeline
During her Budget speech, Chancellor Rachel Reeves defended the changes, stating that the popular scheme was only ever intended to be a 'small part' of the pension system.
"This is not sustainable for the public finances, putting pressure on the tax everyone else pays," she explained. "So I am introducing a £2,000 cap on salary sacrifice into a pension. That is a pragmatic step so that people, especially on low and middle incomes, can continue to use salary sacrifice for their pension without paying any more tax than they do now."
Workers have approximately three years to take advantage of the current rules before the new limit takes effect in April 2029.
