1 in 4 people more likely to increase pension contributions if they understood tax relief better
Fundamental aspects of pensions remain a mystery to many people with 27% of people admitting they have never even heard of tax relief, according to research from Royal London.
Research of 2,000 UK adults carried out by Opinium on behalf of the mutual insurer found that only 15% of those surveyed said they fully understood how tax relief on pension contributions works, while a further 31% said they had some understanding. The remaining 27% 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-third (33%) of women having no knowledge of tax relief in comparison to a fifth (20%) of men. A further third (33%) said they had some understanding of how pension tax relief worked in comparison to almost three in five (59%) 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%) said they now viewed pensions more positively while 25% 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% 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% and 62% respectively saying they had never heard of the terms.
Commenting on the research 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.”
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About Royal London
Royal London is the largest mutual life, pensions and investment company in the UK, with assets under management of £147 billion, 8.7 million policies in force and 4,232 employees. Figures quoted are as at 31 December 2022.
Learn more at royallondon.com