Low-paid public sector workers are paying 25% too much for pensions

 

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I suppose that being in the private sector and mainly involved in DC pension provision, I’ve had a blind spot to public sector pensions. That changed a little over the past two weeks when I started thinking about the problems doctors have in getting good quality pensions advice.

People do watch out for the doctors – they have unions, tax and financial advisers, most can afford to get help and many have the capacity to learn the ropes on their own.

Not so the lowest earners in the great public service pension schemes. Over the weekend I received an email from a peer of the realm which included this statement

The bottom line, which I find so distressing, is that these low earners just don’t seem important enough to anyone. They don’t know and the employer often won’t know either, while providers and trustees have no legal obligation to look after their interests and are turning a blind eye to the issue because it is difficult or may incur costs.

The conversation related to the newly auto-enrolled and the employers referred to were SMEs. But the issue is precisely the same in the public sector where low-earners are automatically enrolled into Government DB plans in the same way as  the private sector.


FOR INSTANCE

If you earn under £15,432 pa , you are already contributing 5% of gross pay into the NHS pension. Provided you are paying tax – typically if you are earning £12k pa or more , you should be getting tax relief that brings the true cost of contributing down to 4%.

But if you are earning less than the lower earnings threshold for income tax (£11,850pa but about to go up) then you get no tax relief and have to pay the full 5%.

Low earners have their own marginal tax problem on earnings between £11,850 and £12,400 as they will only get tax-relief on pension contributions at their marginal rate and having to contribute 5% of £11,850 means most NHS low earners have to earn over £12,500 to get their full tax relief.

We wonder why the Treasury estimate that 1.2m of our population is not getting tax-relief on all their pension contributions. The answer is that a high proportion of low earners missing out – are Government employees. They are paying up to 25% more in pension contributions than if they paid tax.

What’s more, the majority of those denied the promised incentive are women.

What is more, the contributions into the NHS pension scheme, start at £0 and are not calculated on the band of earnings prescribed for AE minimum contributions. So the amount that low earners pay is higher and the amount of incentive foregone is also higher.


Who is looking out for low-earners?

Who’s on the side of the army of part-timers on or close to minimum wage in Government pension schemes?

Looking at Unison’s Pension Literature for the NHS pension scheme, I can see no mention of the net-pay anomaly or any warnings to low-earners that they will not get any form of Government incentive to ease the pain of their contributions (As they would do in NEST for instance).

The amount you pay into your pension is dependent on how much you earn and the current contribution rates are between 5% and 14.5%. Your rate is determined on your full-time equivalent pensionable pay.

Your contributions are deducted from your gross pay which means less of your income is taxable. This in effect means that your actual contribution taking into account tax relief is between 4% and 8.7%. Your employer on the other hand (from 1 April 2015) contributes 14.3%.

This is simply not the case for people earning less than£12,500 and in the NHS Pension Scheme. Tax relief is not available to these people – they pay 5%.


The Net Pay pension scandal is more than a private sector issue.

To date , the issues around the net-pay pension anomaly have focussed on master trusts and the few remaining sole employer sponsored occupational DC pensions. But the issues are the same for DB as DC and the same for the private sector and the public sector.

What I fear is happening, is that Government financial projections on the cost of public sector pensions are now baking in the fact that hundreds of thousands of low paid employees auto-enrolled into public sector pensions (with contributions of 5% of earnings from £0) are subsidising the cost of providing tax-relief to the rest of the membership.

While we have heard plenty from doctors about the AA, LTA and the Taper, we have heard nothing about the fate of the low-earners, who by mischance are paying 25% more for pensions than those who pay a little tax.


Who is paying attention to their pension?

I suspect that the low earning public service worker is the least well-represented of all pension savers. They need a voice.

The private sector is involved in public sector pension schemes but only peripherally (it does some of the administration).

Because most public sector pensions are unfunded, it is a part of the pension genome of little interest to fund managers and investment consultants.

The discussions on benefits are a matter for the Government Actuary, NHS employers and ultimately the Treasury.

I do not see an obvious reason for any group (other than the unions), to pay attention to the net pay pension anomaly and its impact on low-earners.

But low-earners have already been hard hit by the public sector pay cap and many of those impacted by the net-pay pension scandal would be paying tax, if their wages had not been held back as part of the Government’s austerity measures.

It simply is not right that the low earners in the public sector are getting no attention paid to the contribution hurdles that are making participation in public sector schemes so expensive to them.

Which is why I’m writing this. Thanks very much for reading this.


 

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Organisations that do care

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About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Low-paid public sector workers are paying 25% too much for pensions

  1. Adrian Boulding says:

    Those of in the know now believe that this is solvable and that all it needs is a small change to legislation (a clause in the next Finance Bill) and a small extension that we have identified to an existing HMRC end of tax year procedure

    We must keep up the pressure on Government and get the net pay anomaly resolved

    Adrian

  2. Point of Information: No-one pays 5% in the NHS scheme nowadays because of significant rises in the minimum wage and living wage that have taken all workers out of the lowest contribution band. In the NHS the minimum whole-time salary from April is £17,652, which has a 5.6% employee contribution rate (+20.68% employer). If you are part-time and earn say half that you still pay 5.6% of what you earn, as the rate is based on the whole-time equivalent.

    Entirely support the net pay anomaly campaign.

  3. Bob Ward says:

    Entirely agree that this unfair anomaly must be put right, and by the treasury / HMRC. Perhaps now you highlighted the Gov DB schemes Henry the Unions may get involved and put pressure on a quick change. Perhaps the Peer who emailed you could raise it in the House of Lords.

    The fact the sums are quoted in scheme hand books, and that DWP and tPR quoted the calculations in the original Auto Enrolment publications and employer guides, plus their COMPULSORY scripts of the original member joining notices, means the members caught in this trap since George Osborne’s bungled Budget should have a legal case against them for miss-selling. Trouble is none of those affected have the means to pursue that route.

    Why has nobody lobbied the Chancellor or the Treasury. Why haven’t DWP and other Regulators done anything about this great injustice. Wrong that they don’t have a duty – tPR has an absolute Statutory Duty of Dare to ensure auto enrolment members’ membership is in accordance with the original design of AE and that very clearly stated they WILL receive the tax incentives

  4. Unfair, but an anomaly that is born out of our pensions and tax law. Tax relief is not usually used as an incentive for those that pay no tax!

    Low earners would benefit if this was fixed but let’s face it – it is peanuts!

    Rather than try and win this argument let’s just help the low paid with benefits such as Universal Credit – that way the needy get help and are incentivised to work.

    Arguing over £12 a month is right on principle but trivial compared to the extra help already provided to the less well off.

    Mr or Mrs Bloggs working part-time and married to a GP (for example), does she need the extra tax relief?

    No, but there are some that do – focus on the needy!

  5. Pingback: Millions start to properly fund their pension | The Vision of the Pension Playpen

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