2million low earners missing out in £8k free pension cash due to ‘tax lottery’
TWO million low-income earners are missing out on £8,000 worth of free pension cash due to a "tax lottery".
It means that over the course of their working life, some employees get 14 per cent less for their retirement fund due to reasons beyond their control, according to research by Ian Browne, from investment management company Quilter.
In , the pensions expert explained that someone earning £12,499 a year could retire on with a pension pot worth £59,000 while others on the same salary end up with just £51,000.
That's assuming both sets of workers are putting in the maximum four per cent net investment growth and retire at 68.
The issue affects those in low-paid or part-time jobs the most, three quarters of which are typically women.
It's all to do with what type of pension scheme your employer puts you into.
What is pension auto-enrolment and how does it work?
HERE's what you need to know
- What is pension auto-enrolment? Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
- When does auto-enrolment apply? You will be automatically enrolled into your work's pension scheme if you meet the following criteria:
- You aren't already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year in 2018/19.
- You work in the UK. - How much do I contribute? There are minimum contributions that you and your employer must pay.
Minimum contributions are being gradually increased over time.
Your minimum contribution applies to anything you earn over £6,136 up to a limit of £50,00 (in the tax year 2019/20). This includes overtime and bonus payments.
From April 2019, a minimum of eight per cent must be paid into the pension, with the employer paying at least three per cent. - What if I have more than one job? For people with more than one job, each job is treated separately for automatic enrolment purposes. You can still opt out of individual schemes if you want.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Those who are on a "net pay" scheme pay their pension contribution before tax has been deducted.
A "relief at source" scheme takes the pension contribution after tax has been paid.
But it's also subject to a tax relief of 20 per cent, unlike those on net pay, which is then added to the employee's savings directly by HMRC increasing their pension contribution.
The majority of occupational and most public service pensions schemes are on a net pay basis, while traditionally contract-based schemes are relief at source, according to workplace pensions provider Now: Pensions.
Mr Browne told The Sun that the oversight "critically undermines auto-enrolment's purpose which is to encourage equally rewarding savings no matter who you are.
"Ultimately, this makes a mockery of auto-enrolment as the process becomes a lottery which hinges on what type of pension scheme your employer signs up to."
Auto-enrolment, introduced in 2012, sees everyone in employment earning at least £10,000 a year enrolled into a workplace pension.
Top tips to boost your pension pot
DON'T know where to start? Here are some tips from Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and policy and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer must contribute too.
- Track down your pensions: If you've moved jobs a lot, this means you'll have several pension pots. It can be hard to keep track of them all, but the government offers to help you.
- Take advantage of online planning tools: and have tools that give you an idea of what your retirement income will be based on how much you're saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
Since April 6, workers need to pay at least five per cent of their salary into this scheme, while employers need to deposit at least three per cent on top.
The scheme has been hailed for encouraging widespread saving but Browne warns that the problem of the scheme being undermined is only going to get worse.
This is because Phillip Hammond raised the income tax threshold to £12,500 in October last year, widening the gap between the auto-enrolment threshold and the basic rate of income tax.
It means that the number of people missing out on the tax-relief is growing, with lasting and damaging effects on workers' finances in retirement.
The issue is even worse for the rising number of workers who have multiple low paying jobs who are missing out on the government top-up, even though their combined income is more than £10,000.
Unfortunately, there isn't anything workers can do about it as it's the employers that choose the scheme.
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Adrian Boulding, director of policy from Now: Pensions added: "All savers should receive tax relief regardless of the type of scheme they are in.
"By exempting them, the living standards of nearly two million people are at risk.
";Without urgent action there is a real danger that confidence in pension saving and auto enrolment will be seriously undermined."
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