Tax rules are inadvertently creating obstacles
Yesterday the Labour party put forward proposals to lower the earnings threshold at which staff will be auto-enrolled into pensions to £5,772. In this way, more low-paid staff would be brought into workplace pensions savings.
This follows tens of thousands of employees earning less than £10,000 a year finding that they had fallen out of auto-enrolment when the income tax-free personal allowance was raised last month.
It is said that up to 200,000 will have fallen out of auto-enrolment by the time the personal allowance is raised again, to £10,500, next April.
However, the current Conservative/Liberal Democrat government is not keen to change the auto-enrolment earnings trigger (which is linked to the annual personal income tax allowance).
This was a prime example of making a change to legislation in one area, only for it to have a negative effect elsewhere.
I acknowledge that some low earners may be best opting out of pensions savings, but this certainly shouldn’t be the automatic default position for all. Decoupling income tax and pensions is one way to resolve this.
At the other end of the earnings scale, benefits managers are facing a different problem that could slowly undermine workplace pensions.
Reports from the pensions’ frontline tells me that many benefits managers are finding their top executives who have final sign off on the workplace pension are becoming distinctly disinterested this important benefit. The reason is that they have hit their lifetime allowance (of £1.25 million from April 2014), so no longer have a personal vested interest.
I, and I am sure many of you, will feel this is the wrong attitude from the wealthy with the power to decide on workplace pensions. However, it is the reality.
Perhaps it is time to revisit lowering the tax break on pensions to 20% for all, but uncapped? It will still be the best tax break going. (Send your alternate suggestion on a postcard, or fill in your ideas in the comments section below).
Both these clashes, at both the low- and high-earner ends, are difficult squares to circle, but they demonstrate that the more you tweak and introduce legislation, the greater the number of negative knock-on effects you can create.
Why can’t pensions be simple, like individual savings accounts, so more people would understand and engage with them?