How well is the pension tax relief understood? Research suggests not well at all, potentially undermining saving motivations.
Of late, HMRC has been publishing past research that had previously been kept under wraps. One interesting document to emerge details research commissioned in 2015 by Ipsos – the opinion polling company – into the understanding of pension tax relief. Ipsos interviewed over 700 adults and found:
- While nine in ten adults correctly believed that employers contribute to workplace pensions alongside employees, just four in ten thought that the government contributed through tax relief. One in three opted for the safety of “don’t know”, while one in four thought the government provided no top-up. Overall awareness was no different from the average for those in or out of work or for those not currently in pension schemes. However, six in ten of those with non-workplace pensions (e.g. personal pensions) were aware of the benefit of tax relief.
- Among pensions owners aware of tax relief, many underestimated its value. Basic rate taxpayers estimated the government had topped up their contributions by around 6% (around 25% in reality), whilst higher or additional rate taxpayers estimated the government had topped up by around 15% (around 67% or higher in reality).
- Despite the underestimates of the amount of pension tax relief, about half of those aware of its existence said it was “fairly important” or “very important” in their decision to contribute.
- The most important factor in the decision to contribute to a pension for about one third of pension owners was that their employer would contribute. Half as many gave tax relief as the major reason, coincidentally the same proportion that referred to the availability of a 25% tax-free lump sum at retirement.
- As if to underline the misunderstanding of pension tax relief, two thirds of respondents said they would be encouraged to save or save more into pension each month if pension contributions were tax free and pensions taxed in retirement – which is what approximately happens now, if you ignore the extra benefit of tax-free cash.
There are regularly suggestions leading up to Budgets that pensions tax relief will be cut back because of its multi-billion pound cost to the Treasury. One day, a Chancellor may decide to do just that because the impact of his action will not be understood either… As the song says, you don’t know what you’ve lost ‘til it’s gone.