An unfair pensions system for the lower paid

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Royal London
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Supported by
Royal London
An unfair pensions system for the lower paid
(Photo by Peter Macdiarmid/Getty Images)

She says: “The moves that have been suggested by the Treasury, although of course welcome, will do nothing to help the low earners who are losing out for at least another three years or so. That is far too late to stop them struggling more than they should do with rising inflation.

"It is also going to mean more are at risk of losing pension savings altogether in the meantime, because the extra costs imposed on them by their pension scheme – a 25 per cent surcharge on their contributions – may be just that bit too much for them to bear and tip them over the edge into opting out.”

The current NPA means contributions are taken from a worker’s pay before wages are taxed. This means low earners end up with a lower take home salary.

To help low earners, the government published the finance bill 2022-23 this summer to confirm that low earners who save through NPA will get the same level of government top-up as those who use relief at source schemes, where pension contributions are deducted after tax.

A massive 1.2mn people are eligible for this pay boost – with 200,000 set to see a £100 increase in their take-home pay. The average beneficiary will receive an extra £53 a year.

However, the relief will only be applied to contributions made from 2024-25, which means low earners will have to sacrifice millions in pensions tax relief due to the government’s delay.

Altmann says this is particularly frustrating as there was a stark difference to the help currently offered to higher earners in relief at source schemes. 

She adds: “These low earners are often the people who most need help with building up pensions for later life and surely should not be the ones who are most penalised in this way. Higher earners in relief at source schemes can reclaim any higher rate tax relief which they do not receive, but low earners can never claim tax relief until the Treasury’s new measures are put in place in 2025.”

An outcry from the industry

A similar sentiment was echoed by Jon Greer, head of retirement policy at Quilter, who criticises the plans that will result in 1.2mn workers needing to wait until the 2025-26 tax year to see change. 

He adds that this is particularly frustrating as the Conservative party manifesto recognised the problem and pledged to solve the issue back in November 2019. 

He says: “After many years of outcry from the industry, the government finally committed to addressing the inherent inequality for low earners in pension net pay schemes versus relief at source schemes.

“While it is laudable that the government is actually tackling the problem, its solution remains imperfect, but at least better than the current situation, as it commits to paying a top-up contribution directly to the person’s bank account.

"However, this ultimately means they will lose out on potential growth by not having the money held in the pension fund and invested.

"This solution also creates a risk of delay between the pension contribution being made and receiving the top-up.

"It’s been a long road to get to this point, and there are still some miles to go before this quirk in the pension tax system is finally addressed.”

Kate Smith, head of pensions at Aegon, says the government must work closely with the pension industry, specifically with affected schemes, to raise awareness of this issue so low earners do not miss out on the tax top-up when it eventually becomes available. 

She adds: “The process for claiming the top-up needs to be as easy and smooth as possible, bearing in mind that this group is as likely to be the least engaged of pension savers. Ideally [HM Revenue & Customs] should automatically pay the top-up into affected savers’ bank accounts, without the need to make a claim, but this is unlikely to happen.

"To be successful, HMRC should share relevant information with providers and schemes of affected members, to help them target communications and support these savers. Without communication and support, the fear is that few people will claim this tax top-up.”  

Helping the lowest paid

So, what can the industry do to help low earners while they wait years for the government’s relief to start? 

Altmann suggests many practical steps employers can take to help the lowest paid workers within the workplace pension sector.

She says: “The best thing for lower paid workers is for their employer to choose to use one of the excellent workplace pension providers who offer relief at source administration, so that these low earners are not disadvantaged by their employers’ selected scheme for the next couple of years, especially during this cost of living crisis.  

"The second best would be for employers to make up the difference to the low earners by increasing their take-home pay by the amount of tax relief they have lost. This is more complex. 

"Thirdly, it might be an idea for pension providers themselves to ensure these low earners do not lose out in net pay schemes, but again that is both complex and could add to losses incurred on small pots.” 

Clare Moffat, head of the intermediary development and technical team at Royal London, also agrees there are many practical things employers can do to help the lowest paid workers.

She says: “The lowest earners, who are often women, are missing out in terms of tax relief but also in other ways. The £10,000 per job threshold for auto-enrolment means that those who have more than one part-time job that pays less than £10,000 are disadvantaged.

"Many employees and employers aren’t aware that those who earn more than the lower earnings threshold can be automatically enrolled into a pension on request and they would then benefit from an employer pension contribution.

"However, with the current cost of living crisis, long-term saving into a pension may be inappropriate for many low earners.”

Aamina Zafar is a freelance journalist