The UK Pension Fund Change which started on Easter Monday 2015 has many implications for businesses around the country. In a survey made by the CBI, 80% of top executives are against the constant pension changes made by the government given the costs and compliance burdens they come with.
So are UK Pension Fund Changes Good or Bad for Businesses?
In general, it seems it is a bad move. Given the fact that tax benefits are being cut, employees may not feel motivated to save in UK Pensions. Only 25% of the total amount is tax-free. However, if the employee\’s non-tax free amount plus his or her income exceeds £42,386, tax will go up to 40%. If the total amount is over £100,000, the personal allowance is lost.
Most UK businesses ask for stability in terms of UK pension regulations. This is because when a new reform is introduced it is always for the detriment of the employee and thus, the business itself.
Another factor that is causing concern among businesses is the “pension freedoms” issue. Pension freedom means that the employee can withdraw the entire sum saved in one or a series of payments to be used as he or she desires it when reaching age 55. This leaves businesses with a problem since older employees may decide to spend a significant amount of it instead of saving it as retirement funds. Thus, businesses will have to provide them with jobs for longer and longer periods of time. Human resources departments will have to deal with this issue in some way or another. Pension freedoms don\’t require employees to buy an annuity, thus creating a potential of many people left without or with little savings as they get older.
The auto-enrolment rule has also caused rising costs and compliance issues, especially among smaller companies. As processes get more complicated, expenses also rise and this affects the company from a financial point of view. On top of that, lack of compliance in every little detail can also cause delays and possible fines.
The new UK Pension Fund Change has also stated that the maximum amount of money that can be saved in a tax-free pension pot will come down from £1.8 million to £1 million. Employees with higher savings are now more discouraged to save in this new scheme.
Many businesses use pensions as a form to attract and retain employees. With these recent changes, they won\’t be able to use that tool as effectively as they used to. This could mean more potential loses as the cost of losing an employee could range from 30 to 100% of the employee\’s annual salary. On top of that, they wouldn\’t be able to use a pension scheme as bait to attract new talent but would have to resort to other more costly and complex methods.
UK Pension Fund Changes: Employee vs Employer
Employers aren\’t the only losers with the new UK pension fund change. Employees will also see their taxes being increased and thus, their total savings being reduced accordingly. There new limit on the total amount of the pension pot will also reduce the income received annually. Thus, the quality of life for retirees will diminish significantly.
One thing that worries both employers and employees is a possible new fraud wave. Pension freedoms are an easy way for scammers to withdraw other people\’s savings. The way fraud is now being committed is that the fraudster calls a person reaching age 55 and tells them he is the representative of a company that invests in high-growth start ups or other similar investments promising attractive returns. This way, employees are lured to take their money out and put them in the fraudster\’s accounts. It is important for businesses to inform their employees about this illegal activity which could leave them empty handed.
Qualifying for a full state pension will also become increasingly harder. It is estimated that less than 50% of people will see the full amount. And with possible changes in the future, this number could go down.
If employees don\’t have financial education or a competent adviser they might risk running out of money before they pass away. This could also create a social problem for the UK itself.
The only positive thing for employees with this change is that it will be easier to transfer it to his or her dependents. If the person dies before turning 75, no tax will be applied. If aged over 75 at the time of death, the inheritors will pay a 45% tax instead of the prior 55% tax rate.
Written by Eddie Maguire