This article forms part of AgeWage’s response to the Government’s call for evidence on the administration of pensions tax-relief . Here we look at the steps pension provider can and are taking to make consumers aware of the problems of overpaying pensions.

AgeWage is a company set up to help consumers better understand the pension policies they have established. It regards the consumers of pensions in this context as any person or organization who makes use of the generous incentives offered by the Treasury to improve retirement incomes. “Consumers” therefore include employers setting up workplace pensions under auto-enrolment and previously under voluntary arrangements- whether these be employer based contract schemes or trust based arrangements.

The Government consultation would welcome views on whether equalising outcomes by removing the top-up for non-taxpayers would represent a fair solution to this issue?

This would have the effect of returning tax-relief to applying only to those who pay tax and this would have some logic. We would no longer see children gifted contributions into stakeholder pensions getting relief at source (a practice that simply extends tax perks to the mass-affluent) and this might be considered a worthwhile restriction. But to cut off the incentive offered to all workplace pension savers to those on low earnings seems entirely against the principle of financial inclusion on which auto-enrolment and other pension reforms have been built. We note that we have a minister for pensions and financial inclusion which links the two concepts.

We do not see formalizing an abuse as solving an abuse.

The Government asks that it would be useful to understand the impacts on schemes and providers from any such change.

Many of the problems to schemes, providers and employers using net pay, would crystallise if such a move took place. Many schemes would look to move to RAS but few would be able to. It should be noted that this includes the vast majority of Government sponsored defined benefit schemes where employee contributions are always made under RAS.

So the impact on most net pay schemes would be to increase the perception that an injustice had been done, without offering redress for the over-payment of pensions or any solution to the ongoing injustice of the pay-code lottery.

The Government consultation welcomes views on whether employers operating multiple schemes would reliably mitigate the potential difference in outcome for low earners on a consistent basis

It would only do so if employers were easily be able to do so. All the evidence so far suggests that unless employers have advanced payroll systems and processes and a strong pension department, they would not be able to solve the problem by running split schemes. The one employer we know of, which has done so to date (Tesco) has done so with the help of a flexible provider (L&G) because of the immense leverage of Tesco’s reputation, pension assets and future contributions. This example is a poor precedent as few can match Tesco.

The split scheme solution would not be a deliverable, affordable and proportionate solution for small employers with a high proportion of low-earning employees

Nor would it be appropriate for low earners who are members of defined benefit pension schemes

The Government asks what would be the impacts on schemes and providers of requiring all DC schemes to use RAS.

The answer is that there would be uproar from the affluent who would find their immediate access to higher rate tax-relief delayed. Many higher rate tax-payers would neglect the collection of tax-relief. Employers would be disrupted , having to move to a restricted range of administrators and providers capable of running the scheme on RAS (or moving to a contract based provider with the changes in governance that would involve)

This would not  represent a proportionate decision given potential benefits to some employees and employers

The consultation asks whether requiring all new providers of DC pensions to operate RAS represent a fair solution to this issue?

It would be a partial answer, but it would exclude those currently over-paying into their pensions and it would provide no redress to those who have over-paid in the past.

The government would welcome views on the longer-term implications of such a requirement, for example whether this would result in existing schemes re-evaluating their arrangements.

It is easy to foresee all employers re-evaluating their arrangements and moving some or all employees to RAS arrangements but this would be at great disruption quite disproportionate to the scale of the problem – which in any case could be easily and readily solved by the use of the P800 solution put forward by LITRG and NPAG

The Government is interested in views on whether there would be any benefit in extending RAS to all DB schemes as well as DC schemes .

We don’t see why people paying into DB schemes should have to overpay. It would be much better for the Government to treat all contributors consistently. If the Government thinks that those who are contributing to Government DB schemes are paying too little, they might consider maintaining the current contribution rate for low earners to remain the same and putting up the contribution rate for those fortunate enough to get tax-relief. This would result in tax-payers and non tax-payers paying the same without costing the Government  and other hard pressed DB plans more in contributions.

The Government is interested to collect evidence on challenges that prohibit such an approach.

We would suggest that most DB pension administrators do not have the capacity to run RAS and do not have the resource to switch to RAS any time soon. The investment would primarily need to be passed on to scheme sponsors, most particularly Government, which is by far the largest DB sponsor both in terms of numbers of members and size of the contributions.

Government would like views on what changes could be made to the current methods of pensions tax relief that would ensure consistency in outcomes for taxpayers across all aspects of the tax system. 

The only truly fair system is one where it is the outcome that enjoys tax relief with contributions paid out of taxed income. We believe this would focus people on the outcomes of saving and encourage contributions by getting consumers to focus on retirement income.

Government would like  evidence as to how this could be delivered in a proportionate manner by all relevant stakeholders. 

Without pre-empting a separate consultation, we think that a transition from EET to TEE can be achieved by variations on the “scheme pays” concept

Alternatively, the Government would like to know if there is  a balance to be struck in ensuring consistency in outcomes as far as possible, but prioritizing simplicity for individuals?

A simple system that will be more likely than a wholesale shift to TEE might be the application of a flat rate system of tax relief. We understand that the Government have ruled out a major restructuring of tax relief in the immediate future and we would urge the minor amendment put forward elsewhere in this submission will be adopted immediately.

It would like to know if there evidence that would support this approach as more likely to build trust and engagement with the pensions system.

This is a matter for speculation and in the light of the Government’s decision not to reform the structure of tax relief – idle speculation. For what it’s worth we do need to reform tax-relief but we need to put right the net-pay anomaly in the meantime.

The government would welcome any evidence on whether the RAS
system of pensions tax relief administration creates significant additional burdens as compared to net pay, as well as setting out what those burdens are, suggestions for any changes that could be made to ease such issues.

The purpose of RAS was to focus tax relief on those who were excluded from pensions (specifically the non-taxpayer who had little incentive under EET). The system did not work for stakeholder pensions as such incentives don’t sufficiently excite those disengaged from pension saving. It turned out that AE was the turnkey.

RAS is a lot harder to administer both for providers and payroll and , since it has bought little to the table, it may be considered a failure. That does not mean it should be abolished, but it does not look like the long-term future for the pension taxation system.

In particular, the government would welcome thoughts on
the following themes:

• whether the current system of declarations causes difficulty in claiming tax relief

The regional variation of basic rate in Scotland is causing more complexity in administering RAS and this may increase further if Wales has a rate in future. The declarations needed to ensure each set of taxpayers gets the right relief are causing considerable trouble

• any suggestions for practical ways that the earnings limit could be confirmed that would benefit the individual pension scheme member,

We have no suggestions on this

• and potential operational changes needed to support a requirement for interim claims to provide relevant details of individual members

We have no suggestions on this

The government would welcome views on whether there are
operational changes that could be made to improve the operation of the RAS system and improve member outcomes.

We have no suggestions on this.

It would like to know if there is evidence that current processes can help to support some employers or pension schemes; or does the paper-based nature of the RAS system create any obstacles in the process for claiming tax relief?

We have nothing to suggest on this.