When Guy Opperman became Pensions Minister , he had” financial inclusion” inserted into his title; now comes his challenge.
According to Government statistics, there are 675,000 qualifying workers in the “savers rate” of tax, ( the tax band where we pay no tax). 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’s because nearly 300,000 people in net pay arrangements “don’t get tax-relief because they don’t pay tax”, while a slightly larger group get a “Government Incentive” because they happen to be a scheme that operates under relief at source.
Ironically, the largest group of disadvantaged pension savers work for the Government, Government pension schemes operate the net pay system.
Some people have argued that this inequality goes away when pension salary sacrifice is used. It is true that salary sacrifice equalises the positions of low earners but it does so by disadvantaging all low-earners.
|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|
Even if an employer shares 80% of the employer national insurance saving, those on the “savers rate” still get little benefit from salary sacrifice. Salary sacrifice only works for those who get an NI “kicker” and can quality for tax-relief – because they pay tax.
If you “salary-sacrifice” as a tax-payer, you and your employer not only get NI savings you 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!
It gets worse. We have seen that salary sacrifice can make the saver on net pay a little better off (in our example a £10 pension contribution costs £9.70 rather than £10).
But most pension savers who pay no tax are not allowed to get the benefits of salary sacrifice – they are excluded from salary sacrifice because they are on minimum wage
The Government that promised a “savers rate” and “Government Incentives” but has excluded those on the minimum wage, not just from getting the Government Incentive, but from participating in salary sacrifice!
Obstacles to change
There has been a roaring silence from the pension trade bodies on this subject. Only Ros Altmann among “pension heavyweights” has campaigned to include the poorest savers. A flash poll conducted by Professional Pensions magazine found that nearly half (47%) of pension professionals were not only unaware of these problems but saw no reason for change.
Compounding the problems of low-awareness are the fiendish complexities of entitlements and the complexities of the national insurance system.
If the Government are to act on these fiscal exclusions they need to be mindful of two points
- If you earn less than £157pw you get no national insurance saving
- If you sacrifice below £113 pw – you could be losing rights to the state pension
The lowest paid need to make every week count towards ‘qualifying’ for state benefits including single tier pension. Everyone needs to get to the magical 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.
Despite these problems, the Government seem committed to increasing the scope of those covered by auto-enrolment with hints that the lower earnings limit to qualify may be reduced or even removed. They have also pledged to find a way to include the self-employed, many of whom are on the “savers rate” of tax.
We need to ensure that the problem is not made worse. Urgent attention needs to be paid to these issues by HMRC and the DWP. There are nice perks for pension saving, but too few low earners get them. Never mind the width – we owe low earners some quality!