It’s good to see Pension Minister Ros Altmann paying some attention to the pension small schemes sign up to as part of staging auto-enrolment.

Corporate Adviser run the article, the link’s here.

Of course Ros is thinking about the 1,200,000 + small employers who will be thinking about contributing to staff pensions for the first time. not the 100,000 employers who have already got something in place but that doesn’t stop a representative from Towers Watson getting defensive.

”Employers don’t want to change scheme just as we are launching into the consultation into pension incentives that could see the TEE basis abolished. And employers will also want to consider those employees who are 40 per cent taxpayers, who do not have to go to the trouble of reclaiming their tax relief where they aren’t in salary sacrifice arrangements if they are in a net pay scheme.”

Give that man a medal for totally missing the point!

The haves and the have nots.

I can’t think of a better example of the gulf between the pension “haves” and the pension “have nots” than their attitude to pension tax relief.

For the pension haves, it’s about squeezing out the maximum relief for those paying the pension bills- the higher rate and super higher rate tax-payers who can afford to employ a big three advisor.

For the pension have nots its about struggling with the arcane terminology, the complexity of legislation and a system totally warped by the super pension wealthy (in their favour).

But when the warp becomes so obvious that even a Tory Chancellor has to say enough is enough, then watch out. There are plenty of reputations that are going to get bruised.

Why the fuss about net pay?

To make it absolutely clear.

If you are contributing to a net pay pension , (such as the occupational pension schemes that have traditionally been set up by firms such as Towers Watson), you will get no tax relief on your contributions – if you earn less than £10,600.  Infact you have to add your contribution to these tax-free bands before you can get basic rate relief.

So someone contributing £1000 today would have to earn £11,600 today to get the tax relief in full.

If that same person contributed £1000 to a contract based scheme (a personal pension or a stakeholder pension) then they would get 20% tax relief at source even if he or she earned less than £10,600. So the contributor would be £200 pa better off in a contract based scheme than a net pay occupational scheme.

You do not have to be paying tax to get pension tax-relief!

So why  do schemes operate on a net-pay basis?

The answer is in the Towers Watson response – because it is quicker and easier for higher rate tax-payers to get tax-relief from net pay schemes. A nice case of the poor making it easier for the rich to save.

And what of the people who are being auto-enrolled into net-pay schemes (many set up and administered by Towers Watson)? Well if they are earning between £10.000 and £10,600(+the contribution) they miss out on a 20% contribution from the Government!

And people who earn £10,000 or more are automatically enrolled!

Reverse redistribution –

So why – in heaven’s name – do schemes operate on a net-pay basis? The answer is in the Towers Watson response -because it is quicker and easier for higher rate tax-payers to get tax-relief from net pay schemes. A nice case of the poor making it easier for the rich to save.

And what’s more, the people who run these net-pay schemes don’t even know they are denying some members tax relief. I took this statement from the frequently asked questions section of a major occupational pension scheme.

Tax relief is when the Government reduces the tax you have to pay. The Government uses it to encourage people to save for their retirement. You can only get tax relief if you pay tax.

That statement “you can only get tax relief if you pay tax” seems materially wrong. You can get tax relief if you aren’t paying tax – but only if you operate a pension under pension relief at source.

Occupational schemes need not work on net-pay

Not all occupational schemes work on “net-pay”. Master trusts are occupational schemes and NEST offers relief at source. Employers who select People’s pension can choose either system. Towers Watson are about to launch a master trust- I wonder what contribution system it will offer.

 Lord and Lady snooty in their mansion

It’s easy to see why Towers Watson missed the point. They don’t have to trouble themselves with the dirty business of auto-enrolling 1.2m SMEs , micros and micro-micros. They are making their money from the filthy pension rich and from advising on net pay schemes (inter alia).

But let’s be clear about this. the Lord and Lady Snooty’s in Reigate have absolutely nothing to say in the debate about what small employers should be doing. They have their mansion on the hill and the closest they’ll get to an SME is when he’s delivering their clean linen.

 Something in the air

We are on the cusp of getting a new pension taxation system which I hope will do away with the unfair system of pension haves and have nots- make “RAS v NPA” debates redundant and allow us to concentrate on providing workplace pensions for everyone.

Towers Watson are as aware of this as anyone and they would be well advised in the meantime to be a little less haughty and a little bit more engaged in what is going on down the bottom of the hill.