When Guy Opperman became Pensions Minister , he close to have the words ” financial inclusion” inserted into his title, now is the time for him to prove his title’s worth.
Latest estimates suggest that around 300,000 (just under half) of these “savers” are not getting the promised incentives because they are in the wrong kind of scheme. That is no fault of theirs, it is because most occupational pensions pay people under a “net pay arrangement” where if you “don’t pay tax, you don’t get tax relief” .
The reason that phrases like “savers rate” and “government incentive exist – is as spin from the Government that they encourage the low paid, to join the higher paid tax-payers in saving for a workplace pension.
Unfortunately this doesn’t happen. Not only are just under half of our lowest earners not getting the Government Incentive, but if employers try to get them into the system via salary sacrifice, they are stymied by the complexities of a tax and national insurance system that has gone wrong.
Let me show you what I mean
|RAS Non salary sacrifice||Salary sacrifice||Net pay Non Salary sacrifice|
|Take home pay||£78||£79.20||£78|
|Tax relief under relief at source||£2.50||–||–|
|Employer NI added to pension at 80%||–||£1.1||–|
|Total received by pension scheme||£12.50||£11.10||£10|
|Total benefit, i.e. take home pay plus pension contribution||£90.50||£90.30||£88|
The table above shows that for saving £10 into a workplace pension, a non-tax payer, paying national insurance – has to lose £9.50 under the relief at source method of tax-relief. He/She pays £12 NI and gets £2.50 tax relief.
The non-tax payer saving £10 into a workplace pension, paying national insurance gets no tax-relief and is losing £12 in making a £10 payment.
If these non-tax payers moved to salary sacrifice and were rebated 80% of the employer NI saving (a typical discretionary share) and the employee had a reduction in his/her statutory NI – then both the net pay and relief systems would become irrelevant. The employee would get £90.30’s worth of value , pay £9.70 to the Government and would still be down on the deal. Losing the Government Incentive means that salary sacrifice (under an 80% share) makes one group of pension savers (those who used RAS) – worse off! It levels up the unfairness for net-payers, but they are still worse off than the non-tax-payer getting RAS.
Which is rubbish!
Why paying tax becomes makes pension a tax-perk.
If you salary sacrifice as a tax-payer, not only do you get the NI savings (discretionary and non-discretionary) but you also get tax-relief – immediately and at your highest rate.
It means that for every £10 you save, you get a minimum of £2.00 back from the Government and a maximum of £4.50. So a basic rate tax payer sees his/her cost of saving £10 under our salary sacrifice model fall to £92.50 and the higher rate tax-payer to £95.00.
Unbelievably it can cost a super-earner a fiver to save a tenner while the lowest earner pays twelve quid for the same thing!
This is not only rubbish, it is crazy rubbish! Why is the pension taxation system so unfair?
Why salary sacrifice is most unfair of all
If you have followed my argument so far, you will notice that the one chink of light for net-pay pension contributors is that the salary sacrifice model at least gets them somewhere back on track – at least with other non-taxpaying pension savers.
But here is the unkindest cut of all. Many pension savers who pay no tax are not allowed to get the benefits of salary sacrifice – they are EXCLUDED (note Guy- this is the opposite of FINANCIAL INCLUSION).
This is because if you are on the minimum wage, you cannot choose to make yourself better off by saving using salary sacrifice. Your payroll people won’t let you because it is illegal! That’s right, the Government that promised you the “savers rate” and “Government Incentives” has excluded you from the perks that everybody else gets- BECAUSE YOU ARE ON MINIMUM WAGE!
That net pay contributor who is on the minimum wage and pays no tax has no choice but to pay £12 for a £10 benefit. He has to stand on the pavement while the wealthy are chauffeur driven into retirement.
Now I know that Guy Opperman (who had the benefit of having been educated at Harrow) will point out that the Government are only trying to protect the lowest earners from exploitation.
But salary sacrifice is an elected option, people have to choose it – after it’s been explained to them. Protection is built into the system because employers are trying to benefit their staff – all of them! It’s called “EMPLOYEE BENEFTIS” and it’s not happening.
We are waking up to this!
Despite the roaring silence from the PLSA and PMI and the other vested interest groups in pensions, it seems that the majority of pension experts are on the side of social justice.
I point to a flash poll from Professional Pensions that had these results.
Ok , there’ a hard-core of about a third who either don’t like poor people or don’t think they should be saving, but well over half the people polled , thought that the rules should be changed to help ordinary folk who aren’t earning much.
Thanks to Steve Webb for bringing this to our attention. I’m chairing a session this pm where Steve is the speaker and I hope that one of the questions will be on this (hint hint!).
A word of caution.
Thanks to Kate Upcraft for these two timely reminders;
- Salary sacrifice stops saving NI when you earn less than £157pw.
Do be mindful that no one pays National Insurance until they earn over £157 pw;- so there is no NI saving for employers or employees earning below £157pw.
2. If you sacrifice below £113 pw – you could be losing rights to the state pension
Sacrificing to below £113 pw isn’t illegal (as long as your hourly rate remains at least at NMW) but is not advisable as you lose the ‘deemed NI’ entitlement to state pension.
You should be making the week count towards ‘qualifying’ for state benefits including single tier pension. You need to get to the magic 35 years of qualifying earnings.
Earnings between £113 and £157 fall in the “deemed NI” band but if you earn less than £113, you could be counting yourself out of state pension.