Government Incentive to save for retirement needs urgent reform

The Government needs to urgently address the tax incentive regime to encourage saving for retirement


Graham Peacock, Managing Director, Salvus Master Trust


Ros Altmann’s recent comments on net pay arrangements (NPAs) reignite an important shortcoming facing low paid workers across the UK. Speaking at the recent Pensions and Benefits UK conference, she recommended that employers using such an arrangement should think carefully before enrolling their low earners into a defined contribution scheme.


It is heartening to see such a respected figure pushing NPAs back on our radar again. But the worry is that we in the industry are missing the burning issue here – the fact there is an anomaly in the tax system that disproportionately affects the lower paid workers. This could even create a disincentive to save among the groups who need it most.


HMRC and DWP are denying members of net pay pensions the government incentive they should be entitled to.


As things stand, employees whose taxes are subject to NPA and are earning less than £11,500 - the personal tax allowance – miss out on a 25% government bonus, provided via tax credit that their higher paid colleagues currently enjoy. The alternative mechanism, ‘relief at source’ (RAS) means members pay tax before contributions are paid to the scheme, ensuring non-taxpayers do not lose out on any funds. Currently, one scheme is not allowed to combine both RAS and NPA.


Instead of asking employers to shoulder yet more responsibility, we should be looking to those who govern our industry – the TPR, the DWP and HMRC – to make the rules both fair and clear.


To place yet another burden on firms – particularly one so critical to the financial independence of workers – is not only unreasonable, but also raises the risk that employers disengage altogether from anything pension related. This could leave them and their staff in a precarious no-man’s land of neither understanding nor trusting the regulators. There is only so much responsibility a small employer can take.


We must make it a priority to resolve the tax relief problem. We should protect our low paid workers and help employers avoid future redress by allowing NPA providers to claim tax relief for non-tax paying low earners. Additionally, we should remove the restriction that one scheme cannot combine both approaches.


The powers that be have so far taken very little ownership of this issue. In fact, TPR had to be forced to even mention net pay on its website. This lack of clarity is a disgrace. As Altmann said, those on low wages who pay into the system in effect end up paying more than their higher paid colleagues because of the shortcomings of the tax system.


This issue looks set to become even more pressing if the current trend of personal tax allowance increases continues. In recent years, it has risen at a steady clip and this has brought more workers into the auto-enrolment fold.


Of course, we welcome the increased tax-free allowance on earnings especially for the low paid, including women and younger workers, but it is also a double-edged sword in that we could see more and more low paid workers not receiving the benefit of the government incentive to save for retirement.


Michael Johnsone (Centre for Policy Studies) has recently published an interesting set of proposals many of which we support. The starting point must be an open debate of why so much tax relief is given and what we want this to achieve. With pensions tax relief having doubled in 10 years to £32bn pa we MUST make this huge budget achieve a positive outcome. Currently those who earn over £50k pa receive 50% of the overall budget. This is whilst many low paid workers are denied any government incentive due to antiquated legislation that needs urgent attention.


We therefore call on the DWP minister to work with his colleagues across Parliament to address this injustice and focus the DWP budget on those that need an incentive to save for retirement.