A huge chasm between generous public sector pensions and squeezed private sector pensions could be blown even wider next week.
Chancellor Rachel Reeves is expected to protect public sector workers from a raid on employers’ pension contributions in the Budget.
Plans to charge a new National Insurance levy on the contributions that employers pay into workers’ pensions are expected to raise £15.4billion.
But it has emerged that gold-plated public sector workers will be protected from the tax raid while private sector workers take a hit.
This would increase an already massive gap between the retirement income that people are getting, depending on if they were employed in the public sector or for a private employer, experts warn.
Chancellor Rachel Reeves is expected to protect public sector workers from a raid on employers’ pension contributions in the Budget
It has emerged that gold-plated public sector workers will be protected from the tax raid while private sector workers take a hit (file image)
Research by the IFS think-tank has previously highlighted the growing gulf between public and private pension provision
Public sector workers are rewarded with pensions that are mostly funded by the taxpayer and pay out far more generous retirement incomes than to private sector workers.
Calculations by wealth manager Quilter have found that for every £1 saved by a worker into a pension some state-backed schemes pay six times as much retirement income as private schemes.
Civil service workers receive Britain’s most gilded pensions with the highest reward for every pound saved.
Doctors and teachers also get generous retirement packages.
Public sector schemes, known as ‘defined benefit’ pensions, promise to pay a guaranteed income that rises with inflation from the date you retire until you die.
Meanwhile, most of those in the private sector save into modern ‘defined contribution’ pensions where the responsibility for turning a pension plan into retirement income falls on the individual, rather than the company.
Plans to charge a new National Insurance levy on the contributions that employers pay into workers’ pensions are expected to raise £15.4billion (file image)
The latest Whole of Government Accounts published earlier this year highlights the government’s surging liabilities for public sector pensions
Employers are obliged to pay the equivalent of just 3 per cent of their staff’s salaries into the funds each year.
Currently, employers do not pay any NI on money they contribute into pensions on behalf of their staff.
If Ms Reeves announces a new charge on private sector employers, it would have a direct knock-on effect for working people, says Tom Selby, director of public policy at stockbroker AJ Bell.
He warned that it could lead to employers cutting the amount they pay into their workers’ pensions or affect future pay rises as businesses swallow the new cost. This could deal a significant blow to workers’ future retirement income.
Someone earning £35,000 today, whose salary rises by 2 per cent a year, would be £177,000 worse off after 35 years if their employer cut the amount they pay into their pensions from 8 per cent to the minimum of 3 per cent.
The AJ Bell calculations found that someone earning £60,000 today would be £303,000 poorer in retirement.
The Treasury is rumoured to be planning to reimburse public sector employers, including the NHS and government departments, at a cost of £5billion.
Nearly half of employers that pay staff more than the minimum pension will consider reducing their contributions if the Chancellor introduces NI on employer pension payments, revealed an Association of British Insurers poll.
