Research recently published by HMRC highlights the lack of awareness among the public about tax relief in relation to pensions.
The report, which was written in 2016 but only published this month as a result of a FoI request, notes that whilst four in ten adults correctly believe that the Government tops up people's pension contributions through tax relief, about a quarter think the Government provides no top-up; and a third simply don't know.
Those who are aware of the tax relief were asked how much the Government has topped up their contributions to date; the average response was 8% for basic rate taxpayers, 18% for higher or additional rate taxpayers (the actual figures would be around 25%/ 67%).
Among those who were not aware of the tax relief, two-thirds say they would be encouraged, at least a little, to start or increase their pension savings if they heard that pension contributions were tax-free.
The findings indicate a worrying lack of awareness about pension tax relief, but suggest that improved awareness may encourage more people to save into a pension; among those with pension savings who are aware of pension tax relief, six in ten (57%) consider it to have been an important factor in their decision to invest in a pension.
Given their lack of awareness, most people questioned were open to change, although they would not necessarily save more under either of the alternative systems explored in the research (either a flat rate Government top-up to contributions set at 30%, or people being able to withdraw their retirement income tax-free alongside a lower Government top-up of 20%):
▪ Six in ten (59%) said that either alternative is better than the existing system. When comparing one alternative system against the other, the picture is more mixed, with over four in ten (45%) saying no tax on retirement (and a lower top-up) is better and three in ten (28%) saying the flat rate system is better.
▪ Three in ten (28%) think the flat rate system would make them increase the amount they personally save for retirement, and one-third (34%) think this of the tax-free retirement option. In both cases, the majority (64% and 58% respectively) think these different systems would make no difference to the amount they save.
Under any system, there is an appetite for better information to help people understand how much they need to save to be able to have the kind of retirement they envisage. Among those who have pensions and remember receiving pension statements, six in ten (62%) thought it would be very useful to have their statements tell them what they need to save to live comfortably, and five in ten (53%) thought it would be very useful to know how much their retirement income would rise from paying an extra £20 a month.
The full report can be accessed here.
Retirement planning involving pensions is a critical activity for most business owners; at Scholes CA we regularly advise our clients on all aspects of pension tax relief, helping clients optimise the available tax relief taking into account wider business and personal circumstances and objectives. Contact us today to discuss your requirements.