For everyone’s sake – let’s sort pension savings incentives this budget.



Diversity is about including and it’s so important to pensions that we now have a minister of pensions and financial inclusion. A big part of the minister’s job is to create diversity – including not just men and women, different ethnicities, old and young – but also rich and poor.

The way we’ve gone about including the income poor in our pensions is through auto-enrolment and as diversity of income is a pretty good proxy for wealth and poverty, we could say job done.

But let’s stop to think what pension contributions are really doing to bring people together.

Let’s look at a pound’s worth of contribution for a 45% tax- payer ; it’s going to cost 55p.

For a 40% tax-payer the cost of paying into a pension goes up to 60p

For a basic rate tax- payer , paying tax at 20p in the pound the cost is 80p

For the person who earns under the tax-earnings threshold who is a RAS scheme – the cost’s 80p

For the person who earns under the tax-earnings threshold who is a net-pay scheme the cost’s 100p.

So what pensions are doing is making those nudged into contributing pay progressively more per pound of invested benefit the less they earn.

This has been called the “net pay anomaly” but that’s to give it the wrong title, “anomalies” are for people who use that word and most of the 1.7m low earners use a different phrase – if they knew about this they’d call it the “net-pay rip-off” a “payroll lottery” that sees some get savings incentives and others denied them.

This is the very opposite of inclusion, it is tax discrimination at its very unfairest and it has to stop.

AA, LTA and MPAA – rich man’s tax problems

At last week’s PLSA conference there was plenty of talk  – and a dedicated session – about the problems those who want to save more than £40,000 pa and those who’ve saved more than £1,000,000 may have with a 55% tax-rate on a portion of their savings.

A broken promise

But there was no session or indeed discussion of the 1.7m people getting none of the promised 25% enhancement to their savings promised by the Government when auto-enrolment was rolled out in 2012. In it’s consultation on pension taxation in July 2015, the Treasury concluded the opening section as follows

1.24 Average contribution rates will rise as the minimum contribution levels under automatic enrolment increase to 8% in 2018 (of which the individual will pay 4%, the employer will pay 3%, and the government will add tax relief of 1%).

However, it is still important that the right incentives are in place to support individuals to take responsibility for making sufficient contributions to their pension to meet their expectations. That is why the government is considering how it can go further to ensure that individuals are supported to save.

The Government stopped talking about 4+3+1 soon afterwards but the pensions industry didn’t and to this day the idea that employers pay 3, members pay 4 and the Government pays 1 is assumed to be the case. It isn’t!

1.7m of us who are in net pay pension schemes are getting 3+5 and the Government is shaving its “tax-foregone” from pensions from the poorest.

So let’s be clear, if we want a diverse, inclusive society which treats those on low-incomes properly we

  1. Incentivise those who find it hardest to save
  2. When we promise incentives we keep our promises
  3. When a scandal of unkept promises comes to light – we don’t sweep the problem under the carpet.

When I tweeted at the PLSA that the incentives of 1.7m savers were being short-changed by 25 per cent, I got this reply from this year’s chairman

I know how hard the PLSA is campaigning  but I think they could campaign harder still. The cost of remedying this problem is tiny compared with tilting at the AA, LTA and MPAA windmills.

HMRC are discriminating agains the low paid via a payroll lottery

It is farcical that low earners  in net-pay pensions get no incentives and those in RAS schemes get a 25 per cent boost. Among the 1.7m losing out are all low-earners in Government Pension defined benefit schemes, those in employer sponsored occupational pension schemes and people in most master trusts (the exceptions being NEST – which is exclusively RAS and Super Trust and People’s Pension where employers choose which method of tax-relief to operate.

The problem has arisen because the earnings threshold for auto-enrolment has stayed at £10,000 while the income tax -threshold has jumped from £6475 to £12,500 since the AE rates were set. Coupled with the perverse impact of income spikes that can leave people in- who habitually earn less than the earnings threshold, it’s easy to see how over a million of  the 10.5m new savers are being denied the value of incentives for the money they’ve contributed.

Value for money is a hot topic for pensions and for regulators. So why are these savers not getting the value of their promised incentives?

A problem for everybody

In every sense this is wrong and it a national disgrace in the making.

We will of course realise this in time , when we’ve let the problem run on a few years to a point where the Treasury say that putting the wrong right is unaffordable.

While the PLSA and HMT signal “sensitivities” to each other, the scale of the problem grows bigger every year. The talk is of taking away the auto-enrolment lower earnings limit – as identified as the next step in the 2017-8 auto-enrolment review. This would double the difference the incentive makes to over ten pounds a month in take home pay and – compounded with a doubling of contributions would make pensions unaffordable to many.

I say “unaffordable”, the impact would not be in opt-outs but in an increase in household poverty – for the low incomes do not opt-out but pay up – because they see pensions as a tax. Pensions are just an extension of the austerity they have to put up with and that’s just not right.

I am a fan of NEST’s sidecar, which seeks to lift these low-earners out of the cash-trap where every bill means thinking about payroll loans. I’m a big fan of having some sidecar savings. But how can people possibly afford the sidecar when they are paying so much over the top by way of ordinary contributions.

The net pay problem may not effect NEST directly – but in its broader role as improving financial inclusion and financial capability, NEST has a role to play in supporting the abolition of the net pay anomaly.

The solution

Earlier this month, the Government’s own Office of Tax Simplification published a report that highlighted the problems ordinary people have with pension taxation

The overall effect of the income tax changes has been to create a range of complexities and anomalies, resulting in uncertainty and confusion.

It goes on to highlight the net pay issue with detailed case studies and statistics that are in line with this blog.

It concludes

3.28 One method of resolving the anomaly10 would involve using RTI data to capture pension contributions and incorporate them into the PAYE process, so that in relation to net pay schemes, tax relief could be given as part of the end-of-year reconciliation process (P800), potentially resulting in a refund to the individual or the scheme.

3.29 Another possibility would be to extend the work already being done to identify Scottish taxpayers who pay income tax at the 21% rate, and to use that mechanism to identify those taxpayers not receiving the 20% top-up under net pay arrangements.

3.30 However, the amount of money that would be needed to ensure low-paid workers in net pay schemes do not lose out is around £100 million and such a process would cost about £10 million to administer.

Also, if the contributor was a universal credit claimant, it would reduce their universal credit in the assessment period in which the tax repayment is received, as repayments of income tax count as income for universal credit purposes

The cost of putting the net-pay anomaly right would be ten million pounds at outset and around one hundred million a year. This compares to the total tax-loss from relief given to higher earners and corporates of forty billion pounds. Putting the net pay problem right would cost around 0.25% on our pensions bill but would benefit up to 1.7m people – it’s supposed with increases in savers and tax thresholds, the numbers missing out has increased from the 1.1m in 2016 to 1.7m today

This really is a no-brainer for Government, the pensions industry and – though the minister for Pensions and Financial Inclusion does not currently consider this is any of his business, I call on him to think about just what harm not putting this right is doing to low-earning household finances.

In the long-term , when this scandal comes to light, people will blame Government and they will blame the Pensions Minister – just as they do over WASPI.

As with WASPI, the Government is in danger , by saying nothing at the time, of handing a future government a hand-grenade with the pin out.

The financial impact

The table below is from the OTS study and shows how people losing out by sixty three pounds a year when on twelve and a half thousand pounds per annum and in a net pay scheme.

Next steps

I intend to submit a version of this blog to the Government’s budget review and to do so before the end of the month. If you have any comments to make on content or style, please send them to me by email  or put  them on the blog comments


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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