both employees and employers stand to benefit from the forthcoming rise in ni contributions
The forthcoming increase in National Insurance contributions will have a positive knock-on effect for pensions.
The Budget, which introduces NI increases for both employers and employees, should encourage employers to make bigger contributions to employee pension schemes, as they would not pay NI on any contributions, said Stewart Ritchie, head of pensions at Scottish Equitable.
For employers and employees alike, participation in salary sacrifices will also become more attractive once the Chancellor's hike on NI contributions is enacted on 6 April 2003.
Under a salary sacrifice scheme, the employer and employee agree that the employee will be paid less and in return the employer will pay more into a pension scheme. This is then considered a pension contribution and therefore not subject to NI contributions.
Ritchie said: 'The incentives next year to use this for pension contributions will be even greater, especially those who would consider sacrificing the amount of salary that takes them over the level that the NI increase will affect.'
Adrian Walker, pensions technical manager at Skandia, noted employers and employees involved in group personal pensions or stakeholder schemes could use this year ahead to prepare for the changes. By giving an employee a greater salary in the way of a bonus this year, the rise could be offset over the next five years through salary sacrifice or dividend payments, he said.
For example, a director of a company who is paid £30,000 a year plus dividends could look to pay himself £50,000 this year with reduced dividends. This creates a NI contribution on the employer for 2002/2003 but allows for a higher pension funding capacity not just for this year but for the subsequent five years, said Walker.
This is because under the personal pension and stakeholder regime, contributions can be based on the highest set of net relevant earnings and used for the next five years.
So next year when the NI contributions are higher the bonus can be offset with higher dividends, which are still NI-exempt, or higher pension contributions, he said.
Ritchie believes the increases in NI will make it politically impossible for the Government to try and bring in compulsory funding of pensions via employer NI contributions. This is because it would involve adding an even greater burden on employers, already forced into increasing their NI contributions from 7 April 2003.
Annuities were also mentioned in this year's Budget, although not in the Chancellor's main speech. Within the actual Budget document the Government has indicated its willingness to go along with the current Inland Revenue proposals on annuity purchase reform. This involves looking at how existing annuity holders can change the terms of their contract and also setting up limited period annuities.
This would be a way of giving investors the chance to switch the nature of their annuity at a later date from, for example, a flat annuity to an index-linked one.
Ritchie said while the move is no surprise he does not believe it will have much of an impact on the retail pensions market as he does not see how either proposal will create any demand.
Using the example of moving from a flat rate annuity to an index-linked one, Ritchie said, an investor would in effect be giving up a higher level of income for what could be a much lower one. The limited period proposals are equally unappealing, he noted, as when the limited period ends annuitants could find themselves in a position where they may be forced to buy a less attractive vehicle.
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