Better grasp of tax relief may lead to more saving

Only 15% said they fully understood how tax relief on pension contributions works, while 31% said they had some understanding, according to research by Opinium

A quarter of people are more likely to save additional money into their pension if they had a better grasp of tax relief.

According to research carried out by Opinium on behalf of Royal London, people view pensions in a more favourable light once they have a better understanding of how it works.

It can even lead to them contributing more towards their pensions over time as almost one-third (32%) said they now view pensions more positively.

Moreover, 25% said they are more likely to raise pension contributions.

Only 15% said they fully understood how tax relief on pension contributions works, while 31% said they had some understanding.

Just over a quarter (27%) said they had heard of it but did not now know how it works.

Another 27% admitted they have never heard of tax relief.

The research also revealed acute differences in understanding between men and women.

33% of women said they had no knowledge of tax relief while a fifth of the surveyed men made a similar confession.

A third of women said they had some understanding of how pension tax relief works. In comparison three in five (59%) men provided the same answer.

Royal London director of policy and external affairs Jamie Jenkins 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, he said.

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, Jenkins said.

He said 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.

The ability to pay contributions for another person and the use of salary and bonus sacrifice are other areas of pension tax relief causing confusion.

Two-thirds said they were unaware they could contribute to the pension of a spouse or child.