Ros Altmann: Net pay injustice must end now

Ros AltmannAuto-enrolment is a much-celebrated success, with around 10 million workers now belonging to pension schemes chosen by their employers.

Unfortunately, however, the complexities of pension administration have created a major problem that has the potential to undermine confidence in it.

The last thing we need is another pensions scandal splashed across the front pages.

Pension providers administer tax relief for their customers in two different ways. The relief-at-source method automatically claims basic rate tax relief (equivalent to 25 per cent of each worker’s contribution) from HM Revenue & Customs, adding it to the pension pot. The alternative net pay method adjusts for tax relief before contributions are paid, whether basic or higher rate.

Providers prefer the latter, as higher earners pay more into the scheme, which generates more fees. It also saves higher-paid members having to reclaim higher rate relief from HMRC.

Ros Altmann: My solution to the DB transfer advice debacle

However, net pay severely disadvantages all workers earning between £10,000 and the £11,850 personal tax threshold, forcing them to pay 25 per cent more for their pensions, as they are denied basic rate relief they would have in a relief-at-source scheme.

This is not a small problem. Most auto-enrolment schemes use net pay, so well over a million of the lowest-paid workers – mostly women – are losing out.

As contributions double again next April and the personal tax threshold rises to £12,500, the number involved will grow significantly.

Most low earners affected by this have no idea they are paying so much more than they should.

But even if they did, they could not recover the money. The employer chooses the pension scheme and Inland Revenue rules do not allow the tax relief to be reclaimed. It seems impossible to argue these workers are being treated fairly.

The government admits concerns but refuses to address the issue. Rather than taking responsibility, everyone claims someone else should sort it out.

Ros Altmann: Automatic pension guidance is the bold reform industry needs

The Treasury says The Pensions Regulator is responsible for auto-enrolment. TPR says the Treasury is responsible for tax relief. The Department for Work and Pensions says employers are responsible for choosing the scheme. Providers (apart from the worthy exception of Now: Pensions) have ducked the issue.

One has to ask what responsibility providers should have to avoid overcharging customers like this and also where trustees’ fiduciary responsibility lies. Net pay schemes are not suitable for these low earners. Unless they receive the money they would otherwise overpay (perhaps from providers or employers), they should be enrolled into another scheme.

It may add some complexity but automatic integration between employers and pension providers can allow low earners to be enrolled into relief-at-source schemes (such as Nest, The People’s Pension or one of the few insurance company arrangements), while others use a net pay one with the same provider or elsewhere.

Sooner or later, these low earners will discover they have paid 25 per cent more for their pensions than they needed to. They may then claim they were treated unfairly.

A growing group of industry professionals is working to resolve this problem. I hope advisers will support us and force the government, providers, trustees and the regulator to address it urgently.

Ros Altmann is former pensions minister


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. I really do not get why this issue is being so broadly misrepresented. Tax relief refunds income tax that is payable now, and effectively defers it to retirement. If no income tax is payable now, there should be nothing to defer so the anomaly is that non-tax payers in relief at source schemes incorrectly benefit from basic rate tax relief when they should not. So if Govt is pressed to correct the anomaly, surely it will do so by preventing non-tax payers from incorrectly receiving tax relief, rather than by multiplying the error by increasing the number of non-tax payers who incorrectly receive tax relief?

  2. Why do pension providers keep coming up with schemes to fleece the customer and line their own pockets? Small wonder that trust in the Financial Services industry is at an all time low. Shout out to Now Pensions for taking moral and correct high ground. Shame on everyone else!

    • With respect Diana, this complaint is that some people are benefitting from something to which they are not entitled, so you want some more people who are not entitled to also benefit. That really doesn’t support the judgements you make in your post.

      • Sorry, I disagree Mark. It has been a known anomoly since well before the first GPP I set up for a client employer. We always advsied the employer and set them up so that it reflected the predominent position of the staff it was suppsoed to benefit. If the senior management wanted a NET pay arrangement seperate from the other staff, that was all well and good, but if the majority would benefit by a scheme that gave them tax relief on pension contributions whether they were a taxpayer or not then I believe the employer covenant meant/means that is what should be arranged.
        Personally I think there is an argument for a group action against employers who have established the schemes on the wrong basis and in turn for them to claim against their advisers. I’d suggest they wait until after April 2015 when the FSCS limit increases.
        Now did the right thing, but no one else appears to have done, but that includes government.

        • And I understand your point Phil. But there are two issues here. First there is the pressure on Govt to act. In my view Govt can only act in the direction of correcting an anomaly, not extending it.
          Secondly, the issue of what pension providers and employers have done in the context that an anomaly exists. I suspect that no judicial body could rule against an employer or provider for failing to take advantage of a position that they knew to be erroneous and anomalous.

          • We’ll have to agree to disagree Mark.

            Pretty much anyone can get tax relief on a net pension contribution of £2,880 per annum with the fund being increased to £3,600 by tax relief whether a non tax payer or not and that includes children who have no earnings. That has been the case for nearly 20 years now and is an incentive for all to save for retirement.
            The government could and should have closed what you consider to be an error or loophole if they thought it was going to cost them too much.
            Knowingly NOT ensuring that staff benefited from this I believe was a failure on the part of some firms advising employer’s especially if they didn’t make the employer aware that this would disadvantage some staff members over others.
            Many of the staff of the first few group schemes we established were lower earners and the employers were forward thinking enough to try and help them build up some form of savings which could not be accessed before age 50 (now 55)for their future so they were not totally reliant on state benefits when they retired. The old trivial pension limit made it a very efficient way for them to accept their employer’s generous matching pension contribution and draw the benefits after receiving tax relief with pretty much NO tax ever having been paid.
            We’ll have to agree to disagree Mark.

  3. I set our first GPP up in 1998. So that is 20 or more years of an ignored issue.

  4. Why not make the minimum wage equal to the current HMRC income tax threshold plus say 10% and then everybody in a pension would receive the tax relief, for example people currently earning say £13,000 would not be getting benefits from Govt. Left hand whilst the Govt. Right hand is taking tax off them?

  5. Christopher Petrie 11th December 2018 at 8:53 am

    Because some people work part time of course.

  6. How is it that we can send a probe to a distant planet and get back pictures yet cant fix this apparent tax/pension anomaly.C’mon guys!

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