Written by HR and Benefits commentator Steve Herbert

In November 1991 that unique and flamboyant musical frontman Freddie Mercury died.  His passing left a huge and immediate hole in both the rock group Queen and indeed UK popular culture.  Yet that same month also witnessed another notable death that was to leave a far deeper and longer-lasting impression on the nation.

Headlong

For media tycoon Robert Maxwell died shortly after it was revealed that he had been caught with his hand firmly wedged in the till of his company pension scheme.  As the dust settled it became clear that his actions would lead to the downfall of both the pension scheme and indeed the Mirror Group itself.

Yet the damage did not stop there.

The scandal led to some well-intentioned – but sadly rather rushed – legislation to avoid other employers also operating schemes without adequate funding in place.  This resulted in many, well run and well governed, Defined Benefit (often known as Final Salary) pension plans suddenly being revealed as not fully funded, and their sponsoring employers facing huge, unexpected, and often unsustainable bills to correct the situation.  In the face of such pressures many such schemes were replaced with inferior Defined Contributions plans, where all the risk (and often more of the costs) for pension savings effectively passed from the employer to the employee.

All of which led in turn to an almost inevitable mistrust in pension planning, a dropping off of employee participation rates within many company offerings, and ultimately the need for auto-enrolment legislation to “nudge” reluctant employees towards saving for their retirement.

The Show Must Go On

Probably the only constant across this pensions saga was the evident need for continued tax relief to encourage savings for retirement.

Tax relief within pensions schemes was (and indeed is) very generous indeed, and pension schemes and advisers up and down the country traded heavily on the benefits of such relief as they sought to sell pension membership to the masses.  Yet I wonder just how necessary that relief is in persuading new employees towards pension savings in 2024?

For auto-enrolment in pension schemes has reduced the need for persuasion, and the legal entitlement to a company pension contribution is a far more compelling story than the complexity of a tax relief system that most employees never really understood anyway.

The Miracle

This has been my view for some time, and the reality was rather confirmed during my recent participation in a benefits “fair” for a group of young professionals at a well-known national employer.

This grouping was young enough that retirement still seems an impossibly long way away, and they had also recently experienced the more immediate reality of the cost-of-living crisis.  Yet each and every employee I spoke to was already comfortably enrolled into their company pension scheme.  The key driver for this participation was (as they each described it) the “free money” provided via the employer’s pension contribution.  It was however notable that not one of the employees I spoke to mentioned tax relief, and I strongly suspect that few (if any) were even aware of this valuable additional element attached to their own pension contributions.

Under Pressure

All of which suggests that the need for pensions tax relief as an incentive to save for retirement is perhaps far lower than was once the case.  It should also be noted that higher earners benefit more from contributions tax relief than moderate and low earners, a mismatch which may be difficult for a Labour government to continue to overlook.

And the groundwork for such a change was undertaken back in 2016 when the then government actively considered – and were widely expected to introduce – significant changes to tax relief on pension contributions.  Those plans were shelved at the very last moment for political rather than practical reasons, and the continued existence of this low-hanging fiscal fruit owes far more to a succession of unstable governments than a justification of the current system.

One Vision

And now things have changed.

The 2024 General Election resulted in a new, centre-left, government with a huge political mandate yet facing a c.£20bn fiscal black hole in the nations finances.

The Labour government has limited options to fill that void, not least because manifesto commitments were made to not increase borrowing, and not to increase the tax take from working people, corporation tax, and VAT.

Those manifesto commitments do not however extend to tax reliefs, and a pension contribution tax relief system which few fully understand – and which overtly favours those on higher incomes – must now be viewed as a viable target for significant change as both a practical measure to save the government money whilst also levelling the retirement savings playing field in one stroke.

Whilst no mention of these changes has yet been voiced, it is notable that the government has already announced some other reviews of the pension system.  I would be far from surprised if changes to tax relief on employee pension contributions did not appear alongside the outcomes of those reviews as they near completion.

Don’t Stop Me Now!

And in the meantime?

My guidance to employers and employees alike has always been to make hay whilst the sun shines.

Employers should encourage their workers to understand, use, and maximise the significant advantages of the existing tax reliefs on pension contributions whilst they can.  The reality is that these reliefs are unlikely to live forever.

Steve Herbert, Employee Benefits & HR Commentator & Presentation Skills Coach