There are too many people in the UK not fully aware of the fundamental aspects of the pension system and they are set to suffer from their lack of knowledge in their retirement.
Royal London surveyed 2,000 UK adults and found 27% had never heard of tax relief.
Only 15% fully understood how tax relief on pension contributions works, while 31% had some understanding of it. The remaining 27% had heard of tax relief but was not sure how it actually worked.
The financial services firm also found a gender imbalance, with women being more likely to not be aware of tax relief (33%) than men (20%).
Of those that knew of pension tax relief in some way, 50% were men and 33% women.
Poor understanding
But the study also revealed that once people had a better understanding of the system, they had a more positive outlook towards pensions (32%), with 25% being more likely to increase their contributions to their retirement pots as a result.
Additionally, many respondents were unaware that they could pay contributions for another person and that they could use their salary and bonus sacrifice.
These are schemes that an individual can enter in with their employer where they agree to receiving a reduction in their salary/bonus for the employer to contribute the difference into their pension.
Some 60% said they didn’t know they could put money in their spouse’s or child’s pension to allow them to benefit from tax relief as well as boost their pots.
Similarly, several of those who took part in the service were not aware of salary and bonus sacrifice – 52% and 62%, respectively.
‘Complicated’
Jamie Jenkins, director of policy & external affairs at Royal London, said: “This research shows how pension tax relief remains poorly understood, with only 15% of people saying they have a full understanding of how it works.
“However, there is a huge positive in that the data shows that once people do understand it better then tax relief has the potential to change how people view their pension, with a significant proportion saying they would be more likely to increase contributions as a result.
“In practice the approach is logical – pensions are taxed as deferred pay – by deferring income for later in life, you also defer any tax payable. There are then additional incentives, such as tax-free investment growth and the tax-free lump sum.
“However, the picture has been complicated by a series of changes to allowances in recent years which has contributed to the confusion on how the system works.”
