The Daily Express has picked up on the “loophole” caused by the increase in the nil rate band that is denying £85m of pension tax relief at source to part time workers (and the very low paid) in occupational pension schemes.
The Express is using the numbers sourced by Jo Cumbo in her article in the FT on Saturday (though the £85m has now jumped to £185m as the Express to include public sector part-timers !)
As it is running the story in a very hight profile way, it’s now reaching that point where the story will get it’s own momentum and this will become a mainstream issue for the “pension industry”.
For the record, the FT’s £85m number looks more relevant. Public sector workers get so much for their contribution from the Treasury that the loss of tax relief (while still inequitable) is only a small part of the story.
Sic Transit Gloria Mundi
For those unfamiliar with the Latin tag – it roughly translates “and so it goes”.
Relief at source is nothing new
There is nothing new in relief at source, it has been around since the introduction of stakeholder pensions, which ushered in the idea that even those who do not pay tax, including children, can be credited with tax relief on pension contributions to their pots.
The practice of pre-funding children’s pensions was popular in the naughties as a kind of middle class tax-prank , practiced by the denizens of nappy valley.
Since the nil rate band was very low in those days, no-one paid much attention to the point of the legislation, which was originally that the 5m of so low paid and part time workers excluded from occupational schemes, would find a way (voluntarily) into the system.
It didn’t work, mainly because employers did not promote stakeholder pensions to these people and these people did not have the money or inclination to invest in stakeholder pensions , the benefits of which were obscure.
What has changed?
Two things have changed since those days.
Firstly there are many more people who are not paying tax but earning reasonable money. The increase in the nil rate band to £10,600 (soon to rise to £11,000) means that many people working part time are now well enough off to enjoy the capacity to save some of their money voluntarily.
Secondly, the auto-enrolment rules mean that many of these people are being included in workplace pensions either automatically (because they earn £10,000 or more) or because they are entitled to join a scheme (earning less than £10k but with means to pay). There is a third group- non-eligible workers who are either too old or too young to be “eligible” but who can opt-in to an employer contribution whatever they are earning.
What hasn’t changed?
Despite the serious amounts of money thrown at large occupational pension schemes, in terms of administration, consultancy and most of all – contributions, nobody seems to have noticed that the old system of granting tax-relief- known as net-pay, is totally useless for anyone earning at or below the nil rate income tax band. This is because, under net pay, you need to have taxable income to claim back tax.
So occupational pension schemes have carried on advertising the terminological inexactitude that “you can’t get tax relief if you don’t pay tax”. The phrase “terminological exactitude” was used in the House of Commons as an alternative to the word “lie”, when it was thought improper to suggest a member of the house might be fibbing.
For example, someone contributing £40pm to their pension would have to earn £11,080 to get tax relief on all the contribution (£10,600 + £480).
If they earned £10,600, they would get no tax relief at all under net pay.
But if they earned £11,080, they would get an extra £96 back from the taxman in a year.
However, someone making a contribution of £40pm under the relief at source would only need to pay £32pm (£384pa) to get the same pension benefit.
The £85m number is calculated using a rough estimate of the number of part time and very low-paid workers in this kind of situation who would be better off under Relief at Source than net-pay.
The £(1)85m raises the point but isn’t the point
The real point is that occupational pensions, which have the resources to do what they want , have chosen to ignore the issue. Some pension managers may be unaware that the issue exists, so unimportant is the issue of what low-paid workers get in their pensions (to them). Other managers may point to their consultants , who have generally failed to pick up on this issue, and many will blame the Government or the PMI or the NAPF for not bringing this to their attention.
But the reality is that everyone sat on their hands and thought no-one will notice. Well this blog notices and the FT noticed and now the Daily Express has notices. And guess-what, we now have another problem on our hands, because we thought that the interests of the low-paid and the part-time workers could be swept under the carpet.
People matter more than sums
The only way we can get confidence back into pensions is by paying attention to the pensions that people get. Whether that be the employer choosing the workplace pension for his or her staff, or the consultant advising a mega-occupational scheme, it comes down to the same thing – people matter more than sums.
Until we learn to be fair to all the people we employ, we will not have learned the less on auto-enrolment, which is that a private pension system must be inclusive.
This net pay v RAS argument is a big story because it is about the way we treat people. People who earn a little are not second class, they are not even a different class, they deserve as much attention as those who pay higher rate tax.
When we begin to learn that lesson, we will have moved on and things really will have started to change.