Automatic enrolment  

How the new govt should reform pensions

How the new govt should reform pensions

Auto-enrolment provider the People’s Pension has published five demands on the next government to improve pension saving in the UK.

In particular the provider wants the next government to help people on low incomes, reduce the gender pensions gap and to make pensions more transparent. 

Auto-enrolment has widely been considered a success with 10m more people now saving for retirement than did before the policy was rolled out in late 2012.

But in its new manifesto, published today (November 12), the workplace pension provider urged the government to ensure people are saving enough for a comfortable retirement and millions of workers aren’t unnecessarily excluded from auto-enrolment.

Gregg McClymont, director of policy at The People’s Pension, said: “The topic of pensions may not be a vote winner like the NHS or Brexit, but with millions of people at risk of not having enough to live on in retirement, it’s an issue that all politicians should care about and act on."

The manifesto included five demands:

  • End the ‘net-pay anomaly’ which deprives an estimated 1.75m low earners of much-needed tax relief through auto-enrolment;
  • Extend auto-enrolment to millions more workers by making pension contributions begin from the first pound of earnings, lowering the eligible age for auto-enrolment to 18, and reducing the earnings requirement to the primary National Insurance threshold of £8,632;
  • Introduce a universal flat rate tax relief between 25-30 per cent to increase the pensions savings of those who need it most;
  • Reduce the gender pensions gap by accepting the principle that caring is an economic activity which should attract workplace pensions contributions;
  • Support a one stop shop, publicly operated pensions dashboard free from commercial sales pitches, featuring all pensions entitlements from day one, and with pension charges disclosed in a standard format.

The ‘net pay anomaly’ issue concerns members of pension schemes who don't pay income tax but miss out on the basic rate tax relief granted to others in that situation.

HMRC grants 20 per cent tax relief on pension contributions of up to £2,880 a year. But this is only available where the pension scheme operates on a relief-at-source basis, which is only accessible through a handful of companies.

It is not available for schemes that operate a net pay arrangement, which are the majority of pension funds in the market.

The People's Pension believes the issue deprives an estimated 1.75m low earners of tax-relief through auto-enrolment, while others are excluded because of their age or earnings.

Auto-enrolment currently only captures workers aged 22 or above who are earning at least £10,000 per year.

Meanwhile, the provider wants to reinvigorate the pension tax debate by calling fo a flat-rate system of tax relief.

Previous Conservative chancellor George Osborne had mulled bringing changes to the way pension tax is calculated but dropped plans in the run up to the 2016 Brexit referendum.

There hasn't been much noise around the issue since, with the exception of the NHS pension scheme, which prompted a consultation to be launched earlier this year after it emerged doctors were cutting their hours to avoid punitive tax charges.

Mr McClymont said: “There can be no doubt of the positive impact that auto-enrolment has had, but the next government must work to ensure that people are saving enough for a comfortable retirement and that millions of workers - in particular women - aren’t unnecessarily excluded from auto-enrolment."

Helen Morrissey, pension specialist at Royal London, agreed that auto-enrolment had got off to a good start but added that ultimately its success will be determined on the outcomes people receive. 

She said: “It’s no good enrolling lots of people if they don’t contribute enough and so end up with a poor retirement income. The government needs to look at what more can be done to increase contributions beyond the current 8 per cent minimum.