Australia has a feature in its pension system that changes how tax is applied to pension saving for people on low incomes and shows how support can be distributed differently.
In Australian superannuation, contributions are taxed at 15% when they enter the fund, and for most workers this is a tax saving because their income tax rate is higher than 15%. For low earners, income tax can be lower, down to 0%, so a 15% tax on pension contributions can mean they pay more tax on their pension than on their wages.
The government addresses this through a tax offset that refunds the tax paid on pension contributions for people below a set income threshold, up to a cap. This applies to employer and personal contributions and is paid automatically into the pension fund.
This is a correction rather than an additional benefit but over a working life it can add around AU$15,000 to a pension pot.
The UK system raises a related issue. Tax relief increases with income because it is linked to marginal tax rates. Higher earners receive more relief per pound contributed, while low earners receive basic rate relief at best. In relief at source schemes, low earners receive a government top up even if they do not pay tax. In net pay schemes, low earners can miss out on this entirely. The result is that people on similar incomes can receive different levels of support depending on scheme design.
Australia keeps a flat contribution system but adjusts outcomes through the tax system. This shows that support can be redistributed without changing contribution rules or employer behaviour. Even a relatively limited adjustment to tax treatment can increase pension balances over time.
For the UK, the most immediate lesson is practical rather than structural. A simple way to improve outcomes would be to extend the relief at source approach across all schemes, so that all low earners receive a top up regardless of how their scheme is set up. This would remove the net pay anomaly and ensure consistent treatment.
Beyond this, the example raises a wider question. If tax relief is intended to support pension saving, it could be structured to provide more support to those with lower earnings and lower levels of saving. At present, the structure directs more support to higher earners. The Australian example shows that this is not fixed. The value of support can be adjusted within the system, and delivered automatically, in a way that increases pension balances for those at the lower end of the income distribution.
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