Tax-based financial incentives for savings are wasted on the lowest paid workers as they may not have the means to contribute more into their pension, the Organisation for Economic Co-operation and Development (OECD) says.
Such tax perks should instead be focused on the best-paid who may struggle to achieve a good replacement rate in retirement, making it difficult to achieve the same standard of living as in working life.
The comments came as the OECD published its biennial Pensions Outlook report on 7 December, noting that non-tax-based incentives would better among the lowest paid.
Speaking at the report’s launch, Stéphanie Payet, one of the organisation’s private pensions analysts, said matching contributions, fixed nominal subsidies and auto-escalation would do more to boost low-paid workers’ retirement pots.
“When you look at the different replacement rates, the higher the income, the lower the replacement rate for the pension systems,” she said. “You can use the financial incentives to target towards those who are not able to maintain the standard of living with just the mandatory pension system.”
She continued: “For low income earners, they are not very sensitive to tax incentives. The nice feature of non-tax incentives is they are not linked to the tax bracket. Non-tax incentives provide higher tax advantages to low earners.”
In addition, existing tax discrepancies must also be addressed. The OECD noted the “wide gap” between low-paid savers in net-pay schemes and relief-at-source schemes.
The gap is set to worsen from next April as the increase in the personal tax allowance outpaces that of the growth in the lower earnings threshold for automatic enrolment (AE) savers.
A 33% flat rate of tax relief could both “reduce the differences between income groups, without necessarily removing the incentive to save for any individual,” Payet added.
A flexible retirement and state pension eligibility age could also be a “good approach” but “careful” design is pivotal, the OECD added.