I thought I had heard all the bad news there was to hear about the problems borne by members of defined-contribution pension schemes but it now transpires that not only do people in contract-based schemes carry the risks of investment markets and annuity pricing but they can also lose out if they cannot cope with the burden of sorting out their own tax planning.
Most high-earners I know who are members of group stakeholders or group personal pensions think their tax relief is sorted out for them. Unlike trust-based schemes, however, responsibility falls on them to claim back their higher-rate tax relief.
I have to admit that despite having written about pensions for eight years now, I have only just discovered this. Even though I work in a publishing company that majors in financial services, it turns out that the majority of my journalist colleagues are as much in the dark as I have been. If we do not know about it, I would estimate that most of the higher-rate taxpaying public do not either, unless an accountant or IFA tells them.
Standard Life calculates that as many as 250,000 higher-rate taxpayers are not getting their higher-rate pension relief. Given that there are four million people in work-based private pensions and roughly 12 per cent of workers are higher-rate taxpayers, then it looks like most highearners in GPPs and group stakeholders are missing out.
This is clearly a serious flaw in the system that is supposed to be the future of pensions in the UK. We all know that the switch from defined-benefit to defined-contribution schemes has left employees short-changed when it comes to retirement funding but now it turns out that a majority of those grappling with the hard realities of the new breed of workplace pension are getting it seriously wrong and missing out on a big slice of their contributions.
For the high-earners involved, this is corrosive stuff although, on the plus side, they are able to claim back six years of rebates from the Revenue if they find out about it.
Who is at fault for this financial planning failure? The responsibility technically rests on individuals but it is providers, IFAs, the Revenue and The Pensions Regulator who should be making sure that these scheme members get the tax relief that makes pensions worthwhile.
I would not expect the Revenue to make a priority of telling higher-rate taxpayers how to claim back what must add up to hundreds of millions of pounds in tax relief but I would expect more from providers and IFAs.
Providers should be making employees love their products and if they are missing out on what could easily be a substantial amount each year, they are surely not doing their job properly.
The same could be said of the human resources departments of employers and it is a similar story for corporate IFAs. Several I have spoken to say they tell higher-rate taxpaying staff to claim this money but I am not convinced all do in a way that gets the message over.
Then there is the role of TPR in this. Last month, the public accounts committee, an influential body of MPs, criticised TPR for making “a slower start in the regulation of money-purchase schemes”. It said much remains to be done in improving standards of governance and communications with members.
If most higher-rate taxpayers in contract-based defined-contribution schemes are not getting their full tax relief, then member communication has clearly not been as successful as the public should be able to expect.
Conversely, the last thing the industry wants now is more regulation on these schemes. At present, for group stakeholders at least, employers need only do the very minimum to meet their regulatory requirements. With personal accounts set to offer employers a free ride when it comes to regulation, the lives of providers and advisers will be made even more difficult if there are more rules on private sector schemes.
Providers should be doing far more to make sure that every higher-rate taxpayer in their schemes gets their full relief in the first place. If new regulations come in to make them do this, they will only have themselves to blame.
John Greenwood is editor of Corporate Adviser Money Marketing