Defined contribution (DC) pension schemes should prepare for the impact of changes in the forthcoming Budget, Hymans Robertson has warned.

The firm outlined how five potential changes to the taxation of the pensions system could affect DC schemes and individuals who save with these schemes, as well as employers.

The first possible change was the removal or reduction of national insurance (NI) savings on employer contributions, to which the firm suggested that employers should consider the increase in costs if they can afford to continue the current contribution structure to employees and review if they share NI savings with employees.

Another possible change was a flat rate tax on pensions, Hymans Robertson said that employers should consider employer costs are unlikely to increase assuming DC member saving behaviours do not change.

However, it suggested that due to this, higher earners may no longer see pension savings as tax efficient as before and seek to put their savings elsewhere.

The firm also pointed out the possibility there could be a reduction in the tax-free cash allowance on pensions, arguing that employers should consider investment strategies that target 25 per cent of assets at retirement in cash, which may no longer be appropriate and should be reviewed.

This could see the government introduce protections for individuals who already have savings of £1.073m and are planning to take the current maximum tax-free cash.

Another consideration for employers about a reduction in the tax-free cash allowance on pensions would be if/how they can support staff in applying for such protections.

In addition to this, another potential change the paper highlighted was the inclusion of pensions in the inheritance tax (IHT) regime.

This could result in savers spending more of their pension pots, which could add to increased work for administrators and pension administrators may have to pay IHT bills in respect of pensions.

The final possible change Hymans Robertson set out was pension tax credits on UK investments and said that although costs were unlikely to increase for employers, they should review the level of investment in UK funds in default strategies.

Commenting on this, Hymans Robertson head of DC Corporate Consulting, Hannah English, said: “It is crucial that DC pension schemes prepare for the Budget in advance.

“While we do not recommend that employers make changes before the Budget is announced, we strongly recommend that they start to consider now what the budget may mean for them and their employees.

“This will enable them to act quickly once the announcement is made on 30 October."

English suggested that some of the changes examined in the paper could have a 'direct impact' on the efficiency of pensions savings.

“This, coupled with the complex nature of pensions, could result in some savers becoming more susceptible to scams or making illogical pension decisions,” she explained.

“As an antidote to this, we advise that firms review and update any communications to their members.

“They should ensure they are kept up to date in the run up to, and on Budget day of possible changes – but encouraged not to take knee jerk decisions now in anticipation of a change that could not come.”

She added that Hymans Robertson would advise DC schemes to examine whether they could use modelling tools to help savers understand their savings, and how their savings could be affected by policy changes announced in the Budget.

“This would allow savers to think through what they will do with their pension pots in light of the announcement on 30 October,” she continued.

“As the old saying goes, failing to prepare is preparing to fail – and nowhere is this more pertinent than on Budget Day.”

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