I’m republishing yesterday’s blog on the Government’s decision to align the positions of low earning savers however their employer pays their contributions. The original was heavily edited through the day and this updated version reflects the views of many of my colleagues on the net pay action group and of pension experts commentating on social media. The post is important to me ….
Firstly to celebrate this happening and to thank everyone who has campaigned for this (especially Adrian Boulding and Ros Altmann and the good people at the Low Income Tax Reform Group)
Secondly because it’s an imperfect solution and I want to publicise the wrinkles, some of which we can hopefully iron out
Thirdly to lament the loss of incentives for those who have been over-paying into workplace pensions for up to 10 years and will never see the impact of that over-payment in their retirement outcomes.
#Budget2021: “The government will introduce a system to make top-up payments in respect of contributions made in 2024-25 onwards directly to low-earning individuals saving in a pension scheme using a Net Pay Arrangement.”
— Josephine Cumbo (@JosephineCumbo) October 27, 2021
The Government appears to have made a positive move to correct the net pay anomaly and ensure that the future savings of those in net pay schemes are as productive as those in relief at source schemes. Currently those earning but not paying income tax and in net pay pension schemes like Smart and NOW Pensions have to pay 25% more for the same contribution as those in relief at source scheme like Peoples Pension and Nest.
Those in net pay pension schemes won’t get tax relief, but they’ll get the incentive that the Government promised them as part of the auto-enrolment promise as cashback a year in arrears.
Up to 1.2 million individuals, 75% of whom are women, could benefit by an average of £53 a year. As a result of this change, all lower earning pension savers should receive similar
outcomes, regardless of how their pension scheme is being administered for tax purposes.
This is a major turnaround from the Treasury and fulfils a manifesto pledge made by the Conservatives in 2019. It may be over a year since the consultation started and two and a half years till any cashback is distributed , but this is still welcome news.
There are a number of wrinkles
Wrinkle one – the cash flow problem
Net pay savers will still pay more than relief at source savers during the year. There is a cash flow issue for at least 12 months. They’ll get the extra amount paid back to them the next tax year but that’s a long time to wait.
The response talks about the money being paid “directly” to the saver with provisions to savers who don’t do things digitally. This suggests that payments will be made directly into bank accounts or by cheque. It might have been easier to have paid the extra into the pension scheme but many of the pension schemes are defined benefit and this way has the advantage of eventually aligning cashflows between the net pay and relief at source savers.
Wrinkle two – money has to be claimed
Contrary to all principles of auto-enrolment and contrary to what the Government’s Real Time Information is supposed to be doing, low paid – often financially vulnerable people- will be asked to claim their £53 back from the tax-man. This is not what happens when the incentive is paid “at source”. The consultation response says that those impacted will be invited to claim their money back, unless the money triggered a cliff-edge occurrence in the claiming of universal credit, it’s hard to see why individuals would ever be worse off with the money being paid to them – why claim?
If there are cliff-edge issues with UC then perhaps the money could be paid into the workplace pension as a bonus sacrifice – Gareth Morgan may want to comment here.
It’s hard not to think that HMRC are using inertia to keep costs down, after all it works with pension credit.
According to Steve Webb
“Govt costings assume that making £53 available to 1.2m people won’t cost them £60m+ but only £10m in year 1, as they are applying a (non) “take up assumption…”
David Robbins of Willis Towers Watson finds evidence of longer term problems with take up
“Putting the onus on individuals to claim a top-up inevitably means that many won’t. The Government rightly says there is a lot of uncertainty about take-up, but estimates the cost at £15 million a year. This implies that under a quarter of the money available will actually be claimed.
This sounds like meat and drink for Martin Lewis and should become a cause celebre for any payroll and pension administrators with the capacity to nudge low earning savers.
Wrinkle three – no cashback till mid 2025
Finally, why do low earners have to wait nearly two and a half years for this to cut in and not get their first top up payment till after April 2025? There’s quite a lot of hand-wringing from HMRC about systems changes and there are claims that the top-up system only came to light late in the consultation, all the same….
Wrinkle four – no back-dating
Sadly, there will be no backdating, so many people who were auto-enrolled in 2012-15 may have lost out for 10 years (the problem arose when the AE band diverged from the lower income tax threshold in 2014).
In my book, RTI should be able to deal with backdating of claims. But maybe we’ve rolled the stone as far as HMRC will let us.
A budget measure (sort of).
The news announcement was not in the budget speech but was published in a response to the year old call to evidence on the subject issued by HMRC. You can read that here.
But as the response was published simultaneous to the budget and autumn statement, we can think of it as a budget measure.
The statement from Government delivers this outcome
In order to better align outcomes for low-earning individuals saving in pension schemes, regardless of how their scheme administers pensions tax relief, a system will be introduced to make top-up payments directly to low-earning individuals saving in pension schemes using a Net Pay Arrangement from 2024-25 onwards.
This news is good news to those in the net pay action group, even if the benefits kick in 10 years late , it looks even at this early stage that either payroll or workplace pension provider should be able to nudge claims out of those affected. The top-up will be “free money” and will make auto-enrolment more affordable to low earners from 2025. This solution covers all savers (including those in DB plans) so it will include the large numbers over-paying to be members of Government sponsored pensions such as the NHS pension schemes.