An ex-Pensions Minister is leading a chorus of critics against the Government, regulators and the industry for ignoring a ‘secret scandal’ that deprives low earners of pension cash.
Pensions campaigner Ros Altmann said she was horrified by the injustice of ‘hidden’ charges, and denounced those in power whom she claims have known about it for years but not bothered to sort it out.
They are ‘passing the buck, claiming it is someone else’s responsibility’, while hard-up savers are losing more and more money, she says. Lady Altmann has vowed to keep fighting, saying: ‘I will not let this go.’ Read her full comments here and the Government’s response below.
Tax technicality: Hundreds of thousands of low-paid workers are being denied up to £720 a year of free Government pension cash
Low paid workers are missing out on up to £720 a year in free Government pension cash due to an obscure tax quirk, This is Money reported last week.
Workers auto-enrolled into pensions are told the money they pay into their retirement pots will be topped up with both employer and Government cash.
But for many on a low pay-rung this is not the case. They never get the Government tax relief, because their employers – often unwittingly – sign up to one of the many ‘master trust’ pension schemes that don’t pay it into their pots.
Those which use a ‘net pay’ system exclude low earners from getting tax relief, while those using a ‘relief at source’ system allow all workers to get it. See the box below for more about the two systems.
A Government spokesperson said: ‘We are committed to helping people save for retirement and building on the success of automatic enrolment with 9.5million people now newly saving or saving more as a result.
Why are some lower earners losing pension top-ups?
Most master trusts, which manage centralised funds for lots of employers at once, use a tax mechanism called ‘net pay’ that is convenient for top-paid staff but penalises lower earners.
This allows higher rate taxpayers on £46,350-plus a year and additional rate taxpayers on £150,000-plus a year to avoid filling in annual tax returns to get Government pension top-ups, in the form of tax relief on their contributions. They get them automatically.
But it means anyone in the workforce earning between £10,000 and £11,850 a year loses their top-ups for good, with no option available at present to claim them back.
There is an alternative tax mechanism which master trusts can use called ‘relief at source’ that does not disadvantage people on low wages.
It gives the low-paid workers their Government pension top-ups, which they would otherwise be denied, while better paid workers still end up getting their full whack by submitting a tax return. Basic rate taxpayers are not affected either way. Read more here.
‘Both net pay and relief at source arrangements have advantages, with relief at source arrangements being particularly appropriate for lower earners – but ultimately is up to employers to decide what is most appropriate for their staff.
‘NEST, which now has over 6 million members, operates a relief at source arrangement as do several other large schemes used for automatic enrolment.”
Altmann’s battle to get the Government to fix the tax anomaly, or to find a technical workaround on her own initiative, has attracted support from other campaigners and influential figures.
Andy Agathangelou, founding chair of the Transparency Task Force, called it a ‘mis-selling scandal’ and predicted that if the Government didn’t sort out the issue it would end in ‘PPI-like litigation’ brought by tens of thousands of people.
Robin Williamson, of the Low Incomes Tax Reform Group, said: ‘There can be no justification for treating those on low pay worse than the higher paid, simply because it would be administratively inconvenient or too costly to correct the inequity.’
Henry Tapper, founder of Pension PlayPen, a pension comparison site for employers, said: ‘I totally agree with Baroness Altmann. It is a disgrace that the first taste for new savers is a false promise of “incentives” that do not arrive.
‘Government is well aware of this and has chosen to sit on its hands as the problem gets worse.’
Meanwhile, Altmann’s predecessor as Pensions Minister, Steve Webb, now policy director at Royal London, said: ‘Through no fault of their own too many low paid workers are missing out on tax relief simply because of the provider that their employer has chosen for them. This cannot be allowed to continue.’
Full comments from those quoted above, plus responses from the Government, regulators and others criticised by Altmann, can be found below.
Altmann said: ‘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,’
Are you a low earner who is affected?
If you are a low paid pension saver who is missing out on Government top-ups to your pot, we would like to hear from you.
Email tanya.jefferies@ thisismoney.co.uk and put ‘Auto enrolment’ in the subject line.
‘Pension providers, Government officials, Ministers, industry bodies and even the Pensions Regulator are allowing this injustice to continue.’
She fears a fresh pension scandal could derail the auto enrolment programme, which has seen more than nine million more people start saving for retirement, once low earners realise what is going on and tot up their mounting losses.
‘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,’ warned Altmann.
A recent probe by pension consultant Hymans Robertson found 14 out of the 17 top master trusts use the payment system which prevents low earners from getting Government top-ups, while the rest pay them to all workers.
However, one of the 14 firms, NOW:Pensions, reimburses low-paid members their lost top-ups, so they do not end up out of pocket.
When This is Money asked all the firms Hymans investigated for a response last week, Smart Pension explained it was in the process of switching to the system that pays top-ups to everyone and Mercer said it was in discussions about doing so.
Scottish Widows said it was reviewing the issue after just finalising its takeover of Zurich’s master trust.
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.
Ex-Pensions Minister and This is Money’s pension columnist Steve Webb explains in more detail here.
The three master trusts that already pay top-ups to all workers are state-backed auto-enrolment scheme NEST, Legal & General, and The People’s Pension.
In addition to its comments quoted above, the Government pointed out that The Pensions Regulator highlights the net pay vs relief at source issue to employers so that they can consider the most appropriate scheme for their staff here.
It believes this guidance provides a clear explanation of the differences between net pay and relief at source processes for employees who do not pay income tax, and signposts which sort of tax relief is offered by each scheme.
A spokesperson for The Pensions Regulator said: ‘Thanks to automatic enrolment, saving into a workplace pension has become the norm. We want as many people as possible to gain the maximum benefits of this.
‘We are working with the government and the pensions industry to ensure this success continues and look forward to receiving Baroness Altmann’s letter.’
The regulator explained that it is for employers to choose a pension scheme that is suitable for their workforce, and this includes giving consideration to tax relief arrangements.
It pointed to its online guidance which provides employers with step-by-step help in doing this, and in how to communicate clearly how they manage tax relief to their staff.
To appear on TPR’s ‘master trust assurance’ list, which helps employers find good pension plans, master trusts have to provide clear communications to employers, including about tax relief, so they can make an informed choice for their employees, it went on.
A spokesperson for industry body the Pensions and Lifetime Savings Association said: ‘We wholly agree with Baroness Altmann that this is an important issue, and we have raised it with Government on several occasions over the past three years.
What are master trusts?
The Government drive to auto-enrol all workers into pensions led to the rise of dozens of master trusts, which manage centralised funds for several employers at once.
It has passed legislation to protect savers using master trusts from losing their nest eggs.
‘The tax anomaly, which is at the heart of this matter, is the challenge that must be overcome. So far, the Treasury has said that there is no “straightforward or proportionate” way of solving the problem but, clearly, the matter cannot be left to rest in this way.
‘Currently pension schemes make a decision on whether to offer “net pay” or “relief at source” (RAS) on a variety of factors, in particular the likelihood of low income earners joining their scheme.
‘Most people on low incomes affected by the tax anomaly are likely to be saving into what are, by far, the largest automatic enrolment schemes: NEST, The People’s Pension and NOW.
‘In the case of NEST and The People’s Pension, this problem does not arise as they are RAS schemes. In the case of NOW, which is a net pay scheme, they will make good any shortfall if the saver contacts them about it.
‘No saver should find themselves out of pocket because of a tax irregularity and this issue is a high priority for both our master trust committee, and for our wider membership.
‘The PLSA and our members believe the best solution for savers is for Treasury to reform this area of the tax regime and it remains an ongoing topic of conversation in our discussions with Government.’
A spokesperson for the ABI, the industry body for big insurers and pension firms, said: ‘It is important that everyone benefits from tax relief on their pension savings and all options to solve this anomaly should be explored.’
Andy Agathangelou, founding chair of the Transparency Task Force, which campaigns to improve financial services for users, said: ‘Baroness Altmann is absolutely right to be demanding change.
Ros Altmann: ‘Government officials have told me workers are only losing small amounts of money, so it does not really matter. ‘That is indefensible’
‘The Transparency Task Force set up our new “Auto Enrolment Team” in March to campaign on a range of issues that might jeopardise the success of AE and we identified the net pay/relief at source mis-selling scandal as a top priority for us.
‘The financial services sector is crying out for exactly the kind of values-based leadership that Ros is showing, again. We need more people that will “stand up rather than stand by”; people that won’t accept that just because it is very difficult to solve a problem we somehow have the right to walk away from it.
‘I accept that the picture of who is responsible for putting it right is blurred, but that must not be allowed to become an excuse for not putting it right.
‘Where there is a will there’s a way; and the proof is there to be seen – if Smart Pensions can reconfigure their systems to look after low earners properly then why can’t all the others that need to follow their lead?
‘The whole financial services industry must cleanse itself of a “profit before principle” mind-set; and everybody that thinks of themselves as a professional in this space has a moral and ethical duty to call out malpractice; Ros has been doing that for decades.
‘Progress begins with realism and we need to wake up to the reality of the situation. I can virtually guarantee that this matter will get sorted; the variable will be whether it will get sorted through regulators and policymakers working collaboratively under the direct instruction of Ministers; or whether it will take PPI-like litigation.
‘It’s always a mistake to under-estimate people power – whether that’s an individual such as Ros or tens of thousands of people putting together a group action through a suitably competent and opportunistic law firm.’
How does auto enrolment work?
Workers aged between 22 and state pension age and earning at least £10,000 a year from one job are now automatically signed up for a pension, unless they make an active move to opt out.
The slice of annual earnings used to determine the amount of contributions that ends up in someone’s work pension fund is currently between £6,032 and £46,350.
This is the minimum, but some employers choose to be more generous.
Robin Williamson of the Low Incomes Tax Reform Group, a committee of the Chartered Institute of Taxation, said: ‘In the interests of fairness and equity it is imperative that low-paid workers are given the same tax relief when saving for their pension as those on higher pay.
‘The Low Incomes Tax Reform Group has often drawn the attention of the Government and the pensions industry to the anomalous situation that low-paid workers whose employers choose pension provision operated under net pay arrangements can simply lose the tax relief intended for their pension contributions, relief that remains available in full to the higher paid.
‘The treatment of such low-paid workers is inexcusable given that there is an alternative relief at source model under which they would receive full tax relief on their contributions.
‘There can be no justification for treating those on low pay worse than the higher paid, simply because it would be administratively inconvenient or too costly to correct the inequity.
‘Government and the pensions industry simply must make the effort to resolve any administrative difficulties that stand in the way of curing this injustice, otherwise those who can least afford to lose a penny in pension provision will be put at a serious disadvantage.
‘The Low Incomes Tax Reform Group remain willing to take part in discussions as to how this may be achieved.’
Henry Tapper, founder of Pension PlayPen, said: ‘I totally agree with Baroness Altmann. It is a disgrace that the first taste for new savers is a false promise of “incentives” that do not arrive.
‘Government is well aware of this and has chosen to sit on its hands as the problem gets worse. Hats off to Ros and to all who give this scandal national prominence.
‘We also support Ros Altmann’s remedy. Where employers choose a workplace pension denies low earners their rights, they should be required to set up a second scheme (such as NEST).
‘We run www.pensionplaypen.com, a website that helps small employers choose pensions. We analyse their payroll data and, where there’s a potential problem, flag this issue before employers purchase. Employers who ignore our warnings have only themselves to blame.’
Steve Webb, ex-Pensions Minister and now Royal London policy director, said: ‘For the lowest earners the help given through tax relief is especially valuable.
‘Through no fault of their own too many low paid workers are missing out on tax relief simply because of the provider that their employer has chosen for them. This cannot be allowed to continue.’
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