One in four people would increase pension contributions if they understood tax relief better, according to new research.
The survey by Royal London found that a significant proportion of people do not understand the basics of pension saving, with 27 per cent admitting they had never heard of tax relief on contributions.
Only 15 per cent of those surveyed said they fully understood how tax relief on pension contributions works, while a further 31 per cet said they had some understanding. The remaining 27 per cent said they had heard of pensions tax relief but did not know how it worked.
Differences in understanding are particularly acute between men and women with one in three women (33 per cent) of women having no knowledge of tax relief in comparison to a fifth (20 per cent) of men.
The data shows that once people had a better understanding of how pensions tax relief works it made them view pensions more positively and could even lead to them contributing more towards their pensions over time.
Overall, almost one third (32 per cent) said they now viewed pensions more positively while 25 per cent said they would be more likely to increase pensions contributions as a result.
Other areas of pensions tax relief causing confusion included the ability to pay contributions for another person as well as the use of salary and bonus sacrifice.
Of those questioned, 60 per cent said they were unaware they could contribute to the pension of a spouse or child enabling them to benefit from the tax relief as well as the boost to their pension contribution.
There were also low levels of awareness around salary and bonus sacrifice with 52 per cent and 62 per cent respectively saying they had never heard of the terms.
Royal London director of policy and external affairs Jamie Jenkins says: “This research shows how pension tax relief remains poorly understood. 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.”
