Huge numbers of us don't know about pension tax relief, and so are missing out on free cash from the Government.
If someone was handing out free money on the street, there would be a scrum, but it seems the same doesn’t apply to pensions. A survey by YouGov has found that a massive 74% of working age people with a pension don’t understand the tax relief they receive on their pension contributions.
An astonishing 50% of people said they would be likely to increase the amount they saved into their pension if they received tax relief on the contributions. They did not realise that you already get this free top-up from the Government.
“This research confirms that tax relief is not well understood and calls into question whether it is really acting as an incentive to save,” says Darren Philp, director of policy and market engagement at The People’s Pension.
[SPOTLIGHT]“Incentives only work where they are clear and understandable. Unfortunately the current system is not up to the job.”
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How pension tax relief works
When you pay money into your pension, the Government will bump up your contribution by your Income Tax bracket.
So if a basic rate taxpayer wants to bump up their pension pot by £300, it would only cost them £240 - the Government would contribute the other £60 (20% of your contribution).
It's an even better deal for higher rate taxpayers. To make a £300 contribution to your pot would only cost you £180, with with other £120 coming from the Government. The first £60 would be added automatically, however the second £60 would need to be claimed via your tax return.
Over a full working life, with your money (hopefully) well invested, that tax relief can make an incredible difference to the size of your final pension pot.
More free cash
On top of the tax relief you get on pension contributions, you will also likely be able to enjoy contributions from your employer. This really is free cash, an effective pay rise that you miss out on if you don’t make use of your workplace pension.
Thanks to the Government's auto-enrolment programme, employers are legally required to set up a pension for their employees and contribute to it. This has been phased in over the last couple of years, with only the smallest employers not taking part already.
For more on how it works, check out Workplace pensions: what it means for you.
Take control of your pension with a SIPP
More on pensions:
Workplace pensions: what it means for you