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Getting lower earners a fair deal in pension saving

Hands on piggybank

Being left short-changed

More than 1 million low-paid pension savers aren't receiving the Government contribution to their savings. Age UK is part of a coalition campaigning to end this unfairness.



Since 2012, employees have been automatically enrolled into their employer's pension scheme, which has meant that 10 million more people are now saving for their later life than before. Auto-enrolment's success is good news – in years to come it will help many older people have a higher income than they would have otherwise enjoyed, and Age UK continues to support it.

In April 2019, the contribution was increased to 8% of an employee's relevant salary (between lower and upper earnings limits). The individual, employer and Government all make a contribution, and this co-funding arrangement will in most cases benefit the employee, who can still opt out of the scheme if they wish.

'Net pay' can mean 'not paid'

One anomaly in how the government contributions are administered has become even more significant with the increasing numbers of lower-income pension savers, and according to the Low Incomes Tax Reform Group this is leaving 1.33 million savers worse off, to a total of £63 a year each. This is a lot of money to lose for many who are struggling to get by.

All of these people are lower earners, who find that they are paying themselves for the Government contribution – hugely unfair and in breach of the promise for the Government to help people save.

The explanation is fairly technical, but goes something like this:

  1. Employers use two types of payroll system for making their pension contributions, known as ‘Net Pay Arrangements’ and ‘Relief at Source’ (RAS). Under RAS arrangements, the Government contribution is automatically claimed on your behalf, by the pension company and added to your pension plan and everyone gets this regardless of their salary.
  2. Under Net Pay Arrangements, the tax relief that pension saving attracts is administered by the employer, who takes the pension payments from your gross (total) pay, reducing your taxable income and therefore the tax you pay. But this means that if you don’t pay income tax, you don’t get tax relief. In effect you yourself would be paying the Government’s contribution – nice for the Treasury, not so good for you.

This problem only affects savers in ‘Net Pay Arrangements’ who earn under the income tax personal allowance (currently £12,500) i.e. they don’t pay income tax. About three quarters of those in this situation are women, making it an important equalities issue – there is already a gender pensions gap, and this is making it worse.

As the income tax personal allowance rises further this means more and more people will be affected, which is why it needs action now.

Putting an end to it

Age UK has joined forces with other organisations and senior figures from the pensions industry to campaign against this. We’ve been working with the other organisations in the Net Pay Action Group to take this forward, including raising the issue with Government Ministers and pushing them on the equalities impact of the policy.

One coalition member has now launched a parliamentary petition to drive the issue forward, which we are supporting. If enough people sign up it will force a debate in Parliament.

Hopefully we can help get some fairness for lower earners, enable them to stay in the pensions system, and enjoy the fruits of their savings when they reach retirement.

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Last updated: Sep 26 2023

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