We cannot treat low-earners as second class retirees.


I am returning again to the complicated tax situation that people earning under the nil-rate income threshold find themselves in when saving into pensions.

I’m doing so for three reasons

  1. From a societal point of view , it is wrong that that some low earners will  end up without tax incentives on their contributions  and on the income arising from their pension savings while others will get both incentives and tax-free income.
  2. Where there are trustees involved, there is a clear breach of fiduciary duty in allowing this to happen. I consider this actionable
  3. Where employers choose to participate in a trust-based pension where this is happening , they are laying themselves open to action from employers in failing to exercise their duty of care.

You may think I am scare-mongering on points two and three , but I am not. If your company runs or participates in an occupational pension scheme that operates on a net-pay basis and if you pay no tax, you are missing out today on a contribution from the Government of 20% of your pension contributions, every time you make one!

Whether the fault lies with the trustees for not making the employer aware of this or with the employer for not ensuring low-earners use a scheme that can give them the incentive, the employee is being deprived of his or her right to the incentive.

The problem at retirement is broader and shallower.

Those who find their earnings (including any pension and taxable benefits from the state) are less than the income tax-threshold, are able to use the gap between what they earn and the income tax threshold to draw income tax free. This is on top of the tax-free cash that they have an entitlement to.

People who draw down so that their total earnings including the drawdown take them into paying basic rate tax, may be paying tax unnecessarily.  There will be many more of such people (the issue is broader), but the responsibility for the way they plan their tax is not the employers or trustees (though clearly it would be helpful if they helped those retiring to understand the opportunity to avoid tax). Though the problem is broader- it is shallower.

How can the net-pay problem be avoided?

Many employers will not think they have a problem as they do not currently employ people with low-earnings who will be eligible for a contribution under auto-enrolment. Most employers under-estimate this; even low-earners can spike into auto-enrolment if they have a special pay period where they earn “pro-rata” above the earnings threshold. Unless an employer is quick witted and uses postponement, these people get enrolled and once enrolled there is nothing an employer can do to opt them out.

The best way to avoid the net pay scheme is not to rely on not having no impacted workers but to make sure there is a scheme which they would join which operates on a relief at source basis. All insured contract based GPPS operate on the relief at source basis, so does NEST, so does People’s Pension (unless you choose otherwise) and NOW pensions though it currently operates net-pay currently pays the Government incentive out of its own funds. All other occupational pension schemes operate on a net-pay basis and are to be avoided by low-earners contributing into them.

The second best way to avoid the problem is – where a scheme is net-pay, to make the scheme non-contributory – typically by making salary sacrifice the default mechanism by which individuals increase the employer’s contribution. This is not as clean as it sounds as many low-earners may find that a salary sacrifice takes them below the minimum wage.

What is the risk?

The worst way of dealing with the problem is for employers and trustees to hide their head in the sand and do an ostrich. This is precisely what most large employers operating DC pensions using their own occupational trust are doing and the clock is ticking on the first class action. In my opinion, any law firm that can find a group of employees contributing into an occupational DC plan and not getting either tax-relief under net-pay or the Government incentive under relief at source, is entitled to inform those staff that their employer and the trustees have been negligent and incite a civil prosecution for the recovery of the tax or incentive lost.


An accident waiting to happen

We only have to think of the tragedy of Grenfell to realise that we can collectively suffer a blind-spot with regards the people who we know nothing about.

The problems associated with net-pay are nowhere so grievous as the disaster that befell Grenfell but the underlying issue is the same. Ignore a problem because it is widespread and difficult and that problem does not go away and one day it ignites into a very serious issue.

The plight of those in Grenfell was predicted and we now know there are up to 60 potential Grenfell’s in which people are still living. Urgent attention is being given to the problem now, though it should have been given before the conflagration.

In a much smaller and less acute way, the problem with net-pay needs addressing now, before there is serious civil litigation. With employee contributions rising from 1-3% of salary next April and to 5% the April after that, the scale of the net-pay problem is likely to escalate fast.

What is needed is a top-down bottom-up approach which targets awareness of the issues (and opportunities) of those on low-earnings not to lose but to get really great tax-incentives.

Missing out on the incentive to get tax-back that you’ve never paid (the relief at source opportunity) needs to be promoted to employers and trustees and to employees.

Using the greatly inflated nil-rate band by those who see their earnings diminish or extinguished in retirement, is a second great opportunity.

Put together, these opportunities present a substantial boost to low-earners savings and spending in later life. It is critical that – as with state benefits – we maximise the take-up of these opportunities.

We cannot allow low-earners to be treated as second class retirees.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to We cannot treat low-earners as second class retirees.

  1. Gerry Flynn says:

    1) A bit of playing Devils Advocate here but why should someone who pays no tax be entitled to tax relief on a pension contribution?
    2) If the low paid employee qualifies for AE then they will be paying an amount of NI. why not adjust the NI contribution to reflect the lost tax relief.


  2. John Mather says:

    The question
    how many psychologists does it take to change a light bulb?
    It depends
    upon if the light bulb wants to change

    This is not just a pensions issue sensible policy is not always easy politics, particularly when almost every person writing about, analyzing, or commenting on a proposal is a beneficiary. Nor is the probelm uniquely British. Shifting the direction of tax incentives to motivate change of habit can only be exercised by those who have the capacity to make the adjustment. The fundamental problem is one of inequality of income and the hoarding of opportunity by the top 20% of earners.

    As Paul Waldman noted in the Washington Post, when Obama tried to direct college funding tax breaks to poorer kinds the proposal “was targeted at what may be the single most dangerous constituency to anger: the upper middle class—wealthy enough to have influence, and numerous enough to be a significant voting bloc.”

    It happened recently in the UK election when Social Care was to be recovered against the home of the beneficiary of the care. As with Obama the Conservative proposition was removed before it was debated.

    The fundamental issue with pensions is that it is almost impossible to save from income using traditional methods to replace income beyond work. The concept of retirement needs looking at in a new way not one associated with the assumption of a 40 year single employer job. Maybe not even delayed until an advanced age.

    Not everyone can yet take 3 months off every year as I have done for the last 44 years but life before death might be a something worth replacing the promises made by religions

  3. Many employers remember the dreadful personal pensions sold in the 1980s and 1990s (and beyond) where all the claimed tax relief was swallowed up in commission and charges anyway! That’s how they were designed! Punters were totally misled and didn’t understand how they worked. Net contributions seemed to grow and tax relief was quietly skimmed off by insurers!
    Indeed in some cases all the contributions/returns disappeared in charges and/or commission (mostly short service cases). Who was prosecuted or held accountable? Yes there was redress on many mis-sold cases where alternative occupational (mostly under trust) membership was available, but where it was not these personal pensions have often withered away to nothing – you know the names: Abbey Life, Allied Dunbar, General Portfolio, Prudential and many more. Who is responsible or held accountable? No-one unless you are lucky enough to have some publicity, e.g.
    O.K. so we have better contract pensions now, but look how long it has taken! How many non-taxpayers are employed anyway? Are they complaining? Probably not because they don’t get auto enrolled and don’t want to bother with minuscule contributions that won’t make any material difference to their standard of living in retirement.
    Automatic tax relief in contract schemes for non-taxpayers is probably only available by a strange quirk – the systems can’t cope with differentiating taxpayers from non-taxpayers, so it helps these folks, but the amounts are so small who is going to bother with a class action? Not even the big unions seem that interested.
    So whilst you have a valid point Henry, which is clearly heart-felt, it is just not a big enough issue to garner any tangible support – a principled stand for the unfortunate few who are not that interested or seem that keen to make a fuss. And there’s not enough to motivate the ambulance chasers!

  4. henry tapper says:

    I’ll deal with the question about whether relief at source for non tax payers is “tax relief”. This question was put to me by Lesley Williams of Whitbread (who have a net-pay Dc scheme for the barristas +) . It isn’t tax relief – it’s a Government incentive to save.

    If Whitbread and many other PLSA members don’t give the members of its scheme the opportunity of this incentive then I don’t know why!!!

    Frankly – it doesn’t matter what you call it, it is just about the only tax-perk low-earners get and it ill behoves highly paid pension people to deny them it!

    • Alan Chaplin says:

      agree. I really struggle to see how trustees, once they are aware (and how can they not be), can fail to act. It is clearly in their members’ interests to maximise contributions.

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