Pension tax proposals rebuffed – ‘there is no need whatsoever for new legislation’
Martin Lewis outlines pension scheme for 16-21 year olds
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Pension tax rules were called into question yesterday as analysis from Quilter showed lower earners are seeing their pension funds lose up to £150million in value. Quilter broke down what’s causing this: “A quirk in the tax system means many on a lower pay rung are not receiving Government tax relief into their pension pots, because their employer has put them in a ‘net-pay’ scheme, while other workers who are in a ‘relief at source’ scheme receive the top up.
“In November 2019, the Conservative Government recognised the problem and promised to fix the system.
“Since then around £142million has been lost in pension funds. In the 2020/21 tax year 1.5 million people lost £62.60.
“While this may not seem like a huge sum when accumulated over the past number of years, once the impact of compound interest when invested in the pension is taken into account, these are significant sums of money that can make a difference to someone’s retirement.
“The figure since the issue was raised in Parliament back in 2016 is significant at £265million.
“If the can is kicked down the road for another year then the loss will be another £95million.”
Quilter went on to call on the Government to take action on this “as a matter of urgency” but additional analysis on the issue highlights this may not be needed.
LEBC, the national workplace pension advisers, detailed it believes “there is absolutely no need for new rules.”
LEBC detailed there are already methods in place to arrange workplace pensions so that all members, whether non taxpayers, basic or higher rate taxpayers, get all the tax relief they are due automatically.
Kay Ingram, a Public Policy Director at LEBC, broke down how this works in practice.
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She said: “The simple solution, which we have already implemented for a wide range of employers, is to offer two schemes which run in parallel.
“Those who are lower earners are placed in a scheme which offers relief at source, so their savings have 20 percent added by the provider, who in turn collects this on their behalf from HMRC.
“Higher earners are enrolled in a scheme which operates via deductions made before tax is calculated, so they get relief at their highest rate of tax payable, with no need to make a separate claim from HMRC.
“Tax paying members may be offered a salary exchange where part of the individual’s pay is exchanged for an employer pension contribution.
“This has the added advantage of saving the pension scheme member and their employer National Insurance contributions of between two to 12 percent and 13.8 percent respectively, as well as tax relief at the full rate.
“Using technology to automate pension deductions means that it is a simple matter to move employees between the two types of scheme if their tax status changes following a change in pay.
“LEBC has found this to be a popular solution with employers and their staff and one which can be applied now.
“There is no need whatsoever for new legislation. The solution already exists.”
Retirees were recently encouraged to look into topping up their pensions as opposed to their ISAs as according to analysis from NFU Mutual, it could be more beneficial.
Following Rishi Sunak’s recent tax changes, it emerged that a million more people could be dragged into the higher rate of income tax over the next four years or so and as such, NFU Mutual reminded those in their 50s they could be better off prioritising investment in pensions over ISAs.
According to NFU Mutual’s modelling, the impact of pension tax relief means the returns available could be boosted by up to 41.6 percent with pensions in comparison to ISAs.
Pension tax rules are laid out on the Government’s website and impartial guidance on the subject can be sought from the likes of Pension Wise and the Money Advice Service.
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