Over the weekend I wrote a piece arguing that GPPs are now trapping millions of savers in structures that are largely being abandoned by Government, Regulators, Employers and Pension Providers
Ros Altmann, with whom I work to banish the net-pay anomaly has rightly pointed out that personal pensions are the home of the relief at source pension contribution and currently helping out the low paid.
Just to point out that the big advantage of GPPs over MasterTrusts for DC pensions (other than NEST) is that they are Relief at Source rather than Net Pay. That makes them far more suitable for workplaces with low earners, who otherwise have to pay a 25% penalty relative to a GPP. Even if the GPP has a slightly higher charge, it does not offset the 25% extra that the low earners pay. Once the Net Pay scandal is dealt with, perhaps it would be safe to put low earners into non-RAS schemes, but currently they are losing out unknowingly, unless they are in NEST or the RAS parts of People’s Pension and L&G, or have been switched on enough to take advantage of NOWPensions partial fix.
So why did personal pensions adopt relief at source?
It would be nice to think that relief at source was dreamt up by HMRC to assist the low paid to get tax relief. But this was not the case. It was introduced so that the high paid and those with capital, could fund pensions for others – wives, children and grandchildren. Payments to other people’s pensions were able to get “tax-relief” even though that person might not be paying tax, meaning that many twenty year olds today have a personal pension funded for them at the start of the century by parents and grandparents.
The practice hasn’t really taken off but you can still use this little wheeze to get your loved ones that little extra in their pension pot.
Once the rules said that Stakeholder Pensions could use relief at source, personal pensions and group personal pensions followed suit and that’s how they gained a competitive advantage over occupational pensions – an advantage that became apparent when hundreds of thousands of people were auto-enrolled into workplace pensions when their earnings were below the income tax threshold.
It would be nice to say that HMRC and personal pension providers saw this coming, but it would be absolutely wrong. The relief at source problem was accidental, the relief at source advantage was deliberate. I am quite sure that the original policy intent was to enable husbands and male partners to help out low-earning wives but RAS created a loophole for the rich – which was readily exploited.
It is in the nature of tax, that rich people find a way to avoid it , while poor people pay it without knowing. The net pay anomaly is a case in point. Rich people love net pay pensions as they don’t have to claim back their higher rate tax relief – while those in RAS schemes do. Which is why posh pensions – those set up by company executives for well heeled staff (occupational pensions) are net pay.
As has been said in previous blogs, Nest adopted RAS by accident and only People’s Pension and L&G properly invested in a RAS system for the sake of its low earners. The rest of the master trusts and occupational pension schemes (including all DB schemes including the unfunded ones) have had to be bailed out by Government legislation that is due to pay rebates of overpaid contributions from the summer of 2025. These rebates will only give compensation for over-payments from April 2024, over payments from the 10 years preceding will never be compensated.
Unlike other scandals involving over-payment (PPI for instance) , the Government has chosen to restrict its liability. The wheels of the HMRC grind slowly and – when it comes to captured revenues, there is rarely a reverse gear.
People who have consistently overpaid pension contributions since the point when people started being enrolled at below their income tax threshold (2014) could now have overpaid well ofer £1500. They are still overpaying today and won’t stop overpaying till April 2024. Even then they will be owed money by HMRC for over a year and will only get the money back on application.
This is hugely unfair and it all arises because 25 years ago, a new system of pension contribution was announced designed to be fairer to non-working spouses and partners.
We often wonder why inequalities exist in our pension taxation system. The answer is because no-one understands the unintended consequences of tax changes.
We see the ongoing problems of abolishing the LTA in the tax consultations that happened last week. The IFS are in the process of investigating yet again the fiscal framework for private pensions, good luck to them!