Universal Credit and Pension Subsidy

HouseTargaryen

Like many single working parents, I get some help through Universal Credit. Due to the taper rate (for every £1 earned, UC decreased by 63p - or for ever £1 lossed, UC increases by 63p), increasing my pension contibutions by an extra £100 a month only costs me £37 as only my 'take home pay' after pension contributions count. And that's not taking into account the reduction in tax as a result. And the fact I get out of paying off my student loan.

Have I missed this being mentioned, or do those on Universal Credit not realise there is a huge pension subsidy available. I put in 21% of my pay and my employer puts in 11%, a total of 32%. All because this reduces my take home pay and UC top me up. 

Does anyone else do this, do you expect the government to close this loop-hole and why haven't I seen this mentioned on this site anywhere?

WillowCat

Yes I do this.  Sadly my company doesn't offer salary sacrifice, so I make a contribution out of taxed income.  I currently pay in £400 a month, HMRC tops up another £100 in tax relief, and UC then gives me a further £252 a month.  So it actually costs me £148 to get £500 into my pension.  I'm approaching 55 and seriously thinking about doubling my contributions to make best use of the facility.

I think in practice most people on UC don't have enough disposable income to do this and/or are so far away from retirement that it seems pointless (we know it isn't, but that's the perception I get when I talk to people). 

As my partner is disabled and is not able to work, and I own our home outright, we are in a more fortunate position than many.  There's also the issue that once on benefits, many will remain on them - particularly if they are renters, and so it's less beneficial to have pension income that would be deducted pound for pound from any benefits in retirement.  Our entitlement will end the minute my partner gets his state pension and we will be free then to draw down whatever income we like from my pension without it affecting any other income (my earnings/my pension etc).

NedS

HouseTargaryen said:

Does anyone else do this, do you expect the government to close this loop-hole and why haven't I seen this mentioned on this site anywhere?

It's not a loop-hole, as you describe it, but rather a government incentive much like tax relief on pension contributions to encourage you to save for and be self sufficient in your retirement. One of DWPs stated objectives is to ensure financial security for current and future pensioners by helping people to increase their pension savings.

As you correctly identify, there is a massive benefit for anyone claiming UC to increase their pension savings as they will not only benefit from 20% tax relief but will also benefit from not being subject to the 63p taper on earnings, so could receive an £88 boost for each £100 saved.

spaniel101

I do this also, equally for Child Tax/Working Tax.   It comes under the hood of Income Tax (Earnings and Pensions) Act 2003 et al, and subsequently reflected in the relevant legislations/regulations;  Pension Contributions to a personal/private pension are excluded from 'Earned Income', and discussed on here a few times.  

zagfles

The "loophole" has been there for around 15 years in tax credits, it's been discussed a lot on the forums here but it's not something you'll likely see in any MSE article or guide. It was even better in tax credits when there was the big disregard in income increases, plus it was more accessible as capital didn't count so people with savings could use it.

Originally UC was going to use the HB rules and only deduct 50% of pension conts, but it was changed to 100% probably because it would complicate the RTI (real time data feed) system.

spaniel101

In relation to UC, there is no specific requirement for direct link with RTI feed.   Pension payments can also be deducted from relevant earnings post taxed income after receiving wages/salary (as in Willowcat's example). 

zagfles

spaniel101 said:

In relation to UC, there is no specific requirement for direct link with RTI feed.   Pension payments can also be deducted from relevant earnings post taxed income after receiving wages/salary (as in Willowcat's example). 

Yes. But the point was that if they'd gone with the original plan of pension conts being 50% dedictible as with HB and some other means tested benefits, then the RTI feed would get complicated. How would it handle sal sac for instance? Or even net pay? It would lead to inconsistencies and unfairness between contribution methods however it was done. Of course those already exist with NI etc but would be much greater. And in the end, even with tax credits I don't think significant numbers took advantage of the opportunity to build a large pension at little cost, so I guess they didn't see this as being a big issue.

HouseTargaryen

zagfles said:

Originally UC was going to use the HB rules and only deduct 50% of pension conts, but it was changed to 100% probably because it would complicate the RTI (real time data feed) system. 

Hurrah for complicated technology