Ros Altmann: ‘Government officials have told me workers are only losing small amounts of money, so it does not really matter. That is indefensible’
Former pensions minister Ros Altmann is campaigning for low earners to get the same Government cash received by all other savers into their pension pots.
Auto-enrolment has been a huge success with millions of employees now saving in a pension scheme at work. Confidence in pensions is at last being rebuilt, but a secret scandal could derail the project.
Pensions are a brilliant deal – they offer ‘free money’.
Pension contributions are deducted automatically from salary, and workers should get at least an extra pound for every pound they put into their pension – their employer pays in too and they are entitled to at least a 25 per cent bonus from Government tax relief.
This ‘buy one, get one free’ deal helps them build up larger pension funds.
But, disgracefully, the lowest earners – mostly women – are being forced to pay over the odds for their pension.
Most large pension providers use an administration mechanism called ‘net pay’, which does not enable those earning between £10,000 and £11,850 a year to get the taxpayer bonus.
Why are some lower earners losing pension taxpayer bonuses? Read more here.
Instead, the scheme charges them an extra 25 per cent instead. But nobody tells them – the extra charges are totally hidden.
This month, all workers’ auto-enrolment pension contributions have tripled, so the money these low earners is losing has also tripled.
Some pension ‘mastertrusts’, which manage worker’ retirement savings for large numbers of employers at once, use a ‘relief at source’ system that does not disadvantage people on low wages.
What do the Government, Pensions Regulator and industry players say?
We round up responses to Lady Altmann’s accusations here
The Government-sponsored NEST scheme and a few others make sure low-paid workers get the same taxpayer bonus as everyone else.
But most mastertrust providers use the ‘net pay’ system because it is more convenient for top-earners – and more profitable for the pension firms involved.
Higher and additional rate taxpayers earning £46,350 or more a year can avoid having to fill in a tax return to get their Government bonus, and the pension provider gets more money to manage and higher fees.
Hundreds of thousands of low-paid women (and many men too) are being penalised without knowing because this suits higher earners and pension firms.
Even worse, there is no mechanism for the low-paid workers to recover the money.
This is a huge injustice in our pension system, not just because of the people it affects – the low-paid for whom saving in a pension is a big sacrifice and who need as much help as possible to achieve a good pension – but also because those who have known about the issue for years have not bothered to sort it out.
Pension providers, Government officials, Ministers, industry bodies and even the Pensions Regulator are allowing this injustice to continue.
Net pay and relief at source
Employers and their pension providers have two options when handling pension tax relief for staff.
Net pay means workers contribute directly into their pension before their tax bill is calculated, so their pension tax relief is already included and there is no need to claim it from HMRC.
Under relief at source the pension provider claims the income tax relief directly from HMRC and adds it to each worker’s pension.
This is Money’s pension columnist Steve Webb explains in more detail here.
Ministers have told me in response to House of Lords written questions ‘the Government appreciates the concerns for low paid workers enrolled in net pay schemes. However, it has not been possible to identify any straightforward or proportionate’ solution.
It may be difficult, but that does not excuse failing to sort this out.
Astonishingly, the Government’s recent review of auto-enrolment ignored this issue.
The Pensions Regulator’s ‘mastertrust assurance framework’ set up to identify ‘good schemes’ ignored this issue.
The current consultation on how mastertrusts should be made safer for customers ignores this issue.
Even the PLSA industry body’s mastertrust committee, designed to help savers in mastertrusts achieve a better income in retirement, has allowed this scandal to continue.
All those supposedly responsible for sorting the scandal out are passing the buck, claiming it is someone else’s responsibility.
The Treasury says the Pensions Regulator is responsible for auto-enrolment, while the Pensions Regulator says the Treasury is responsible for tax relief.
The Regulator also says the Department for Work and Pensions is responsible for the mastertrust framework and employers are responsible for choosing the scheme.
Meanwhile, more and more workers lose money. The bottom line seems to be that these low earners just don’t matter. But the buck has to stop somewhere.
If or when they discover they have been forced to pay so much more for their pensions than they needed to, what will they do? Who will they blame and claim redress from?
They had no control over the choice of auto-enrolment scheme. It was arranged by their employer.
But employers are not pension experts, and pension providers and the Regulator should surely have refused to allow low earners to be automatically enrolled into net pay schemes, unless they are reimbursed for the money they lose.
I will not let this go. I have asked to meet Ministers and am writing to the Pensions Regulator calling for new rules that ensure low earners do not lose out like this.
I am also trying to find a technological solution – perhaps an administration system that enrols low-earners into NEST or relief at source schemes, while others can stay in a net pay scheme.
Government officials have told me workers are only losing small amounts of money, so it does not really matter. That is indefensible.
Most low-earners need every penny they can get. The money should be theirs, but they don’t know they are losing out. They are being misled into believing their pension scheme is suitable for them and have no chance to protect themselves.
I have no wish to undermine the successful auto enrolment initiative, but I fear this issue will end up harming people’s faith in it. Until this is addressed, the injustice will only get worse.
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