Treasury reports major misunderstandings of pension tax relief

HM Treasury has responded to a Freedom of Information (FoI) request, which asked for a copy of research into public attitudes to retirement savings and pensions taxation that was carried out to inform the 2015 consultation Strengthening the Incentive to Save. As part of its response to the FoI request, HM Treasury has published Pension tax relief: awareness, understanding and saving behaviours which was originally intended for publication in 2016, but was delayed due to the effects of the EU referendum.

Even though pensions tax relief cost the government an estimated £42.7bn in 2020-21, and is frequently flagged as a possible area of reform at successive Budgets with threats of cutting or reducing the tax break from the current 20% tax relief for contributions for base rate taxpayers, approximately 40% those questioned did not realise they received tax-relief. 

When those with pensions who are aware of pension tax relief were asked how much the government has topped up their contributions, the mean response was by around 8% for basic rate taxpayers (versus 20% in reality) and 18% for higher or additional rate taxpayers (versus 40% in reality).

The research also looked at whether there were better ways to incentivise people to pay into pensions, asking whether a flat rate government top-up to contribution set at 30%, or people being able to withdraw their retirement income tax free alongside a lower government top-up of 20% was preferable.

Three in 10 (28%) thought the flat rate system would make them increase the amount they personally save for retirement, and one-third (34%) favoured the tax-free retirement option. In both cases, the majority (64% and 58% respectively) thought these different systems would make no difference to the amount they save.

Many adults had not heard much about the mechanics of pension tax relief. Half (51%) were aware of relief rates varying based on incomes. However, when it comes to some of the more complex allowances and limits, awareness levels plummet.

Three-fifths (59%) had never heard of the annual limit on tax-free contributions, and two-thirds (34%) knew about the lifetime allowance limit although at over £1.073m this affects a small minority of the working population.

There are also low levels of awareness about pension statements, which the industry is trying to address with the creation of a pensions dashboard where savers will be able to see all their pension contributions in one place. This is currently being developed but is unlikely to be launched until 2024 at the earliest.

Of those who have pensions, two-fifths said they either do not remember receiving a statement in the last three years (31%) or generally do not read them (10%).

A common theme was that participants wanted a clearer picture of how their contributions and the resulting size of their pension pot translated into the amount they would get during retirement. They felt that statements from pension providers needed to offer clearer information about this, with specific figures.

For more information about pension tax relief, click here to read our article, ‘How to be tax efficient with your pension contributions’.

If you'd like to get a clearer picture of if you're saving enough and the amount you might get during retirement, click here to try our retirement calculator.

The information in the article is correct as of 24/05/2022.