The government has committed to solving the net pay anomaly via top-up payments to aid those currently not receiving tax relief on their pensions, although the system will not be introduced for another three years.
The anomaly means low earners are missing out on a 20 per cent boost on their pension contributions if their scheme operates a net pay arrangement, which is the case with the majority of pension funds in the market.
Having pledged to fix the issue in its 2019 election manifesto, the government today (October 27) announced it will introduce a system to make top-up payments in respect of contributions directly to low-earning individuals saving in a pension scheme using a net pay arrangement.
However, while these top-ups are welcome news for many, they will only be permitted for pay received in the tax year 2024-25 onwards - meaning claims cannot be made until 2025-26 at the earliest.
Steve Webb, partner at LCP said: “The proposed fix for low-paid workers is messy, belated and may well be ineffective. The problem of low-paid workers missing out on tax relief has been going on for a decade and will still go unfixed for another three years. And if it relies on people claiming these top-ups there is a real risk of non take-up. This is yet another sticking plaster response to a problem with the pension tax relief system which needs a systematic overhaul”.
Likewise, Steven Cameron, pensions director at Aegon said: “This is a true ‘levelling up’ measure although some will be disappointed that it won’t come into effect until 2025-26.”
The government said these top-ups will help to better align outcomes with equivalent savers saving into pension schemes, with an estimated 1.2m individuals potentially benefiting by an average of £53 a year.
But costing documents released today show the government estimates it will pay out just £10m in 2025-26, suggesting it believes take-up will be relatively low.
Claire Trott, divisional director for retirement and holistic planning at St James's Place, said: "This [anomaly] has been seen as unfair for a long time and the issue has been raised on numerous occasions particularly in relation to auto enrolment.
"The government plans to introduce legislation in a future Finance Bill to make top-up payments directly to low-earning individuals who are members of “net pay” pension schemes to ensure that they are not unfairly disadvantaged.
"This is a great move to help those who are low earners benefit from pension contributions in the same way, wherever they choose to save, or more importantly however their employer has chosen to establish their pension scheme."
Prior to the Budget today, the industry was optimistic that the issue would finally addressed, saying the government had let it drag on for too long.
Ian Browne, retirement expert at Quilter, had said: “It may not be the most glamorous of issues, but if the chancellor is truly committed to helping working people and truly committed to ‘levelling-up’, then he must start by ending the two-tier pension system that leaves many lower-earners worse off.
“The need to come up with a solution takes on renewed importance now Uber drivers are to be enrolled into a pension scheme for the first time, but due to the nature of their work may earn below the personal allowance."
sonia.rach@ft.com
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