Written by: Paloma Kubiak
Baroness Ros Altmann said an auto-enrolment scandal could be brewing, as women and low earnings are hit by the structure and administration of pension schemes.
The former Pensions Minister highlighted a “major pensions injustice” concerning employers who choose an auto-enrolment scheme administered on a ‘net pay basis’.
If your employer offers a workplace pension, it has a choice of two tax-relief arrangements that apply to employee contributions:
- Net pay arrangement: this is where the employer takes an employee’s pension contribution from their pay before it’s taxed (gross) so employees get full tax relief unless they don’t pay tax.
- Relief at source: this is where the employer takes an employee’s pension contributions after taking tax from pay. The pension provider then adds 20% tax relief to the pension pot.
Altmann said the ‘net pay’ system cannot add the tax-relief to contributions of workers earning under £11,500 a year. As such, auto-enrolling these employees into this type of scheme forces them to pay extra for their pension. This disproportionately affects women.
Every £10 that someone on more than £11,510 a year puts into a pension will cost £8 but every £10 low earners contribute costs them the full amount. So the lowest paid are paying £2 more for the same pension contribution.
If their employer were to use a ‘relief at source’ scheme instead, no one would have to pay more than £8 for their £10 of pension. Altmann said most employers do not understand the difference between choosing a ‘net pay’ or ‘relief at source’ scheme.
YourMoney.com has previously highlighted this small but significant problem, urging employees to speak to their employers to find out which scheme will be used, particularly as the newest and smallest employers are now reaching their auto-enrolment staging dates.
Altmann said that when she discovered this issue as Pensions Minister, she desperately tried to address it but “nobody was interested in helping the low earners” as officials said “it’s not much money”.
“Firstly, it may not be much money, but it could and should be theirs if their employer had chosen a different scheme,” she said.
“Secondly, auto-enrolment contributions will quadruple and personal tax thresholds will rise, so the numbers of low earners and the amounts of money they are losing will just keep growing.
“If or when these workers discover they have been charged more for their pensions than they should have been, what will they do? They had no control over the choice of scheme; it was arranged by their employer, who may have used an adviser or relied on regulator and Government guidelines. It is not clear the workers have any protection under the law, this hasn’t been challenged yet. But if the situation remains unresolved, I do believe this could turn into another scandal – which is the last thing pensions need. The injustice is only going to get worse. The sooner this issue is properly sorted, the better.”