Let me describe a situation. Mr Big, a multi-millionaire, sits in his office while the cleaner empties the bin.
He is sorting out personal pensions for his wife and children. None of them works or earns, yet each will receive a “tax-relief” top-up of 25 per cent on the £2,880 he contributes on their behalf.
His cleaner earns £11,500 a year working 28 hours a week on the living wage of £7.85 per hour. She has been auto-enrolled into the pension scheme with the money taken automatically from her wages.
She will not receive a penny in tax relief.
The government, some pensions scheme operators and regulators knowingly connive with this indefensible situation.
The problem is simple. If an employer auto-enrols staff into a pension scheme where tax relief is given at source then every £8 contributed is boosted to £10 by the £2 tax relief. If instead they use a net pay scheme then lower paid employees will not receive tax relief.
The nasty twist affects anyone earning less than £11,500 a year, the current level of the personal allowance. It also affects those earning just over this to some extent as not all of their contribution will benefit from tax relief.
At current minimum rates a low earner could miss out on £23 of tax relief based on a £115 contribution. But from April 19 this could be closer to £125 of lost tax relief based on a 5 per cent employee contribution and a personal allowance closer to £12,500.
Dr Ros Altmann, the former pensions minister, told me she raised this issue again and again while in government, but no one was interested.
Officials apparently dismissed it because it was “not much money”. I wonder how they would feel if they were denied tax relief equivalent to 1 per cent of their salary – even with their taxpayer funded pensions?
Dr Altmann tells me she was also unable to find how many people were affected, but suspects it runs easily into the tens of thousands.
The principle here is simple: it does not matter how little money it is, this should be their money, not the Treasury’s.
She said the Pensions Regulator originally failed to highlight this in template letters to employees, but this has been rectified in new letters. However, it might be that those who signed up some time ago are still unaware they are not receiving tax relief.
Dr Altmann’s one success was with Now: Pensions. Although it operates on a net pay basis it is paying the top-up out of its own resources. Whether that will prove viable as contributions and therefore tax relief increases is another question.
Dr Altmann was only pensions minister for a year – presumably she knew too much about the subject and asked too many difficult questions.
Let us pose one more question: why, Theresa May and Philip Hammond, do you think it is reasonable to award pension tax relief to millionaires and not give similar assistance to those on the lowest salaries?
Lifetime allowance cuts
At the other end of the pensions scale, cutting the lifetime allowance has thrown up an 80 per cent increase in taxes paid by those who have exceeded the limit.
That is hardly surprising. No matter what protection is put in place, many who have saved hard and invested well are going to breach the limits.
The maddest thing about these cuts is that they encourage people to take their pension earlier in order to avoid going through the limits.
How can that make anyone’s retirement more secure?
The government’s desire to restrict the amount it gives away in pension tax relief is understandable, but surely this can be achieved by limits to contributions.
The current system shows of lack of intelligence by those devising policy and a basic failure to grasp how investment works.
Official measure of inflation
CPI or RPI – which is the official measure of inflation? Well, according to the government it is CPI and has been since 2013.
Yet when Vince Cable, the new Liberal Democrat leader, as business secretary, set up student loans he linked them to RPI. Hence the interest rate will rise to 6.1 per cent from September.
It is no wonder students and graduates are in revolt when they are paying higher interest rates than those charged by some used car dealers and about twice the average mortgage rate.
If you are thinking this does not affect you then remember that RPI is also used for rail fares. So each one of you who leaps on a train to get to work is being whacked with the heftiest inflation stick the government has at its disposal.
Tony Hazell writes for the Daily Mail's Money section
