More Than £142M in Pension Funds Lost as Government Struggles to Find Solution, Agency Reports

An anomaly in UK pension schemes cost lower earners roughly £150 million in the last two years, despite a promise from the government to fix the loophole, a financial advice agency reported.

According to Quilter, a “quirk in the tax system” has kept many on a lower pay rung from receiving tax relief on their pension funds. The so-called loophole means those earners are on a “‘net-pay’ scheme” compared to others who are on a “‘relief at source’ scheme”.

The government recognised the issue in November 2019, promising to investigate and fix the anomaly, but since then, more than £142 million in pension funds have been lost, Quilter reported. Another year of inaction will result in an additional £95 million, the company claims.

Quilter noted that while the total sum broken up over the years may not seem like much, once other factors like compound interest are taken into account, “these are significant sums of money that can make a difference to someone’s retirement”. Women are reportedly most affected by the issue “as they account for approximately two-thirds of the people impacted.”

“The government doesn’t seem to comprehend the cost of their sloth-like policymaking,” Ian Browne, retirement planning expert at Quilter, said in a statement. “The net pay issue is not one that has recently come to light and every year the Government fails to rectify the situation millions more are lost.”

The Conservative Government’s website notes that in a net-pay scheme, “your employer takes your contribution from your pay before it’s taxed.”

“You only pay tax on what’s left. This means you get full tax relief, no matter if you pay tax at the basic, higher or additional rate”, the website reads. “You will not get tax relief if you do not pay tax, for example because you earn less than the tax threshold.”

Under a “relief at the source” plan, employers take pension contributions after taking tax and National Insurance from an employee’s pay.

“However much you earn, your pension provider then adds tax relief to your pension pot at the basic rate”, the website states.

But last year, the government called for evidence, saying “low earners saving in a pension may end up in differing financial positions depending on how their scheme is administered.”

“The government is concerned about the potential for a low-earning individual’s take-home pay to be affected by the method of pensions tax relief operated by their pension scheme”, the government’s website read. “The government is keen to explore this issue further to understand what deliverable options for change may exist.”

The government launched a consultation looking for a solution to the problem in July 2020, but it remains unclear if a solution was ever found.

“Any change could create challenges elsewhere, either for pension schemes, their members or the wider personal tax regime”, Economic Secretary to the Treasury John Glen wrote in a statement at the time.

According to Quilter, in the 2020/21 tax year, 1.5 million people lost £62.60 due to the issue.

Quilter said it is urging the government to “prioritise this injustice and provide the long overdue remedy.”

The Treasury did not immediately respond to a request for comment on Quilter’s claims from Law360.

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