How UK employers can prepare for potential pension reforms

Pension Awareness Week begins today, running from 9th to 13th September. The week aims to get people thinking about their pensions and better planning for their retirement years. 

Benifex is proud to support this event once again. With a staggering 77% of UK savers unsure of how much they need in their retirement fund, we are committed to changing the conversation around pensions. By partnering with employers, our goal is to empower employees to make informed decisions about their retirement and achieve positive financial outcomes. 

The UK pension landscape 

The next 12 months may prove to be a pivotal period for pensions in the UK. The new Labour government has already outlined its intentions through the Pension Schemes Bill 2024 which focuses on several key areas: 

• Strengthening Governance and Audit 

• Consolidation of Small Pots 

• Value for money 

• Encouraging investment in the UK economy 

We fully support the proposed improvements in governance and audit standards, alongside the focus on delivering real value for pension scheme members. However, concerns remain about the measures Chancellor Rachel Reeves may announce in the upcoming budget on 30th October. 

Potential pension reforms employers should be aware of 

As the government seeks to balance the national budget and address the deficit, pensions are often a target of reform, given the perception that changes to pension tax legislation doesn’t register as a top concern to most voters. 

Should the government decide to pursue pension reforms, there are several measures they can take. These include revisiting pensions and inheritance tax and bringing pensions fully within the scope of inheritance tax. They may also adjust tax relief on contributions by reducing allowances or implementing a flat-rate relief for pensions. The government’s stated aim of a fairer, more equitable, tax system might lead to them capping the pension tax relief or implementing a flat-rate relief between 20-30% for all contributions, regardless of an individual’s income level. This change could benefit lower and middle-income earners, but could significantly reduce the tax relief available for higher earners. 

A reduction to the Annual Allowance amount is also a possibility, despite it only recently being increased to £60,000 in April 2023. 

Navigating the challenges of pension engagement 

Engaging employees with their pension savings is already a challenging and complex task, made more difficult by potential reforms, which can lead to further employee confusion and disengagement.  

Present bias – the tendency to prioritise short-term needs over long-term goals – is one engagement barrier. Employees can also suffer from information overload ─ when the plethora of information and resources available can be overwhelming, research shows us that people are more likely to ‘choose not to choose’. The hassle factor also has a part to play, where the presence of too many retirement saving schemes can seem overly complicated to employees, which can cause a lack of confidence and result in them feeling indecisive. 

People look to their employers to provide the right information; they trust employers more than banks or pension providers – so the role of employers in changing the conversation and engaging employees in their pension schemes has never been more important.