Only three of the top 17 master trusts offer pension tax relief to their lowest paid members, Hymans Robertson has revealed.
In the research paper, Mastering Master Trusts, the firm found that a majority of those earning below the income tax threshold of £11,850, but above £10,000, the minimum level for auto-enrolment, have potentially been missing out on up to 20 per cent of tax relief since April 2015.
Hymans Robertson head of scheme design and provider evaluation, Jesal Mistry, has said that for the master trusts that don’t currently offer tax relief to their lowest paid members, a “sizable investment” will be needed to adapt their administration system.
Nest, Legal & General and The People’s Pension are the master trusts that do currently offer tax relief to its lowest paid members, while Now Pensions doesn’t offer tax relief at source but does make up the shortfall in lost tax relief for members.
Scottish Widows completed the first phase of its acquisition of Zurich workplace pensions business earlier this month.
Mistry said: “The fact that only three of the master trusts we surveyed offered tax relief at source is not just surprising but a major concern as it could mean thousands of individuals auto-enrolled are not receiving the tax relief they were promised.
“When the relief at source (RAS) method is used pension deductions are taken from net pay and the basic rate of tax-relief is then credited by the pension provider and claimed back through HMRC.”
Members who don’t pay income tax are still able to claim a basic rate of tax relief, or ‘tax relief at source’, of up to 20 per cent on contributions, worth up to £2,880 per year.
“Instead, the majority of master trusts use a ‘net pay’ arrangement where pension deductions are taken before income tax, resulting in the exclusion of those earning less than £11,850 from this relief measure”, Mistry added.
The lowest paid members will be hit further by the increase in minimum auto-enrolment contributions in April this year, while more could be effected if the lower earnings limit for auto-enrolment is removed, suggested in the government’s Automatic Enrolment review.
“For those that don’t, a sizable investment is necessary to adapt their administration system. In the absence of any real movement here it must be now up to government to correct this anomaly created through unintentional legislation and ensure that the impacted many receive what is rightfully theirs.”
Responding to the news, a Mercer spokesperson said: "We are already in discussions with our administration providers on how to implement this functionality into their systems. Currently we make members aware of the implications through the scheme literature.
"The effective operation of Mercer master trust’s governance and administration practices is reflected in its Master Trust Assurance accreditation."
The report highlights that the master trusts operate on a net pay basis which better suites higher earners and Aon senior partner, Kevin Westboom, believes you should be careful what you wish for.
He said: "One “easy” way for HMRC to solve the dilemma between low earners (who are better suited to RAS) and higher earners (better suited to net pay) is to move everybody to a RAS basis – forcing millions to complete tax returns to claim their higher rate relief, and experience delays in the investment of their pensions savings. The danger is that HMRC decide to simplify the RAS process by just abandoning the reclaim of higher rate relief.
"Operating a mixed system (both RAS and Net Pay) is not just a major administrative challenge for the master trusts – but also difficult for employers in terms of their payroll systems, deciding which members should be offered which tax system."
TPP currently offer both types of relief, though not in a one employer arrangement.
An Aviva spokesperson said: “The Aviva master trust operates on a net pay basis. The Aviva master trust has targeted employers with predominantly full time workers who earn more than the income tax threshold and who have previously been a member of a net pay arrangement pension scheme. Therefore it was appropriate for our master trust to operate a net pay arrangement.”
According to Hymans Roberston, master trusts have grown to represent over 35 per cent of the workplace market and account for the savings of more than 7 million defined contribution members in the UK.
BlackRock has declined to comment.
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