Although this option would not create a particular ongoing administrative burden on savers, the government also believes savers who switch between the two schemes/tax relief systems will see the system as complicated and confusing, potentially risking disengagement with pension saving from those affected.
Option 4 – mandate use of RAS for defined contribution (DC) schemes
The name of this proposal might suggest all DC schemes would be required to move to a RAS basis, but that is only one of the possibilities suggested.
The Treasury also suggests a more measured approach could be used.
For example, the requirement might only apply to employers with low-earning employees, or the restriction could be limited to newly established pension schemes – so no change to existing schemes but new schemes would have to be set up on a RAS basis.
The government appears more positive about this option, while recognising that it would involve significant systems changes for those currently involved in operating net pay schemes. It appears to view the proposal as a one-and-done solution within the DC market.
Beyond the significant systems changes required for those operating net pay schemes, the most significant problem mentioned is that it will mean a greater number of higher and additional rate taxpayers will need to engage with HMRC to recover tax relief beyond basic rate.
Those making personal contributions to RAS schemes are already required to submit reclaims for this tax relief, but the in-built nature of the tax relief in net pay schemes means this is not a requirement for those members.
In conclusion, even at this early stage the government is very clear in not viewing any of the options as a magic bullet and acknowledges that it isn’t at all keen on all bar the last one.
It feels like we have a long way to go before the implementation of a solution to this problem.
Gareth James is head of technical at AJ Bell
