Net pay arrangement for defined contribution (DC) funds

29 June 2017

 

Businesses who use a net pay arrangement for defined contribution (DC) funds should reconsider enrolling their lowest earners into that scheme, Baroness Ros Altmann has said.

 

Professional Pensions has reported that the former pensions minister said members might blame employers.  Employees earning less than £11,500 - the personal tax allowance - will miss out on a 25% government bonus, provided via tax credit, if they are put through this system.

 

As these employees will still pay the same proportion in contributions as higher earners, but will not get any reimbursement through tax credits, they will then end up paying more for the same pension.

 

Speaking at Pensions and Benefits UK on 27 June, Altmann urged businesses to take a better look at their workforce and these funds, stating it could prove to be a future scandal.

 

"If you have not looked into the issue of net pay schemes and you do have lower earners, please do. A net pay administration scheme is not suitable for workers who earn under £11,500.

Unless somebody makes up the 25% government bonus they cannot get, you are forcing these lowest paid earners to pay for more than they should. It could be a future scandal.

If they discover they paid that 25% because of their employer's choice of pension administration, who will they blame and what will they ask? You need to think about that."

 

In contrast, 'relief at source' arrangements mean members pay tax before contributions are paid to the scheme, thereby meaning non-taxpayers do not lose out on any funds.

 

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