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Pension scheme needs to work for all – or not at all

More than a million workers are missing out on tax relief on their pension contributions because of a technicality in the net pay pension arrangement. Collectively the failure costs those affected £78million which equates to £64 a year each. With reports suggesting around three quarters of those losing out are women, Stuart Price, Partner and Actuary at Quantum Advisory in Cardiff, looks at how this has happened and what can be done to ensure everyone gets a fair deal.

Stuart said: “Recently the media has been rife with stories about women getting an unfair deal when it comes to their pensions, particularly with the increase in State Pension age. Reports like this are only going to add to the premise that more needs to be done to protect them, as well as the low-paid.

“This ‘technicality’ affects workers who don’t pay tax and are enrolled in a net pay pension arrangement. In this arrangement, pension contributions are taken from people’s wages before tax so they are essentially receiving tax relief at their marginal tax rate. Of course, if they don’t pay tax, they don’t receive tax relief. However, if they were enrolled in a relief at source arrangement which has contributions taken after tax is calculated, HMRC then pay the basic rate of 20 per cent into their pension pot regardless of whether an individual has paid tax or not. They are therefore missing out on an extra £20 for every £80 paid into their pension.

“In order to put things right and ensure the system works for everyone, HMRC or the government needs to step in. One possible idea – although certainly not a solution – would be to educate employers about the ‘technicality’, so they can make an informed decision regarding the arrangement they operate.

“Hopefully, the more people that know about the situation, the more chance it will be resolved.”