Millions who delay pension saving miss out on ‘free money’
People who are will to pay into a pension but have not got around to signing up are collectively losing out on £2.5bn in income tax relief on contributions, analysis has found.
Statistics from website Unbiased showed about 4 million basic rate taxpayers are losing out on billions of pounds in unused income tax relief on pension contributions.
Latest HM Revenue & Customs figures showed the average individual pension contribution is just over £3,000 a year. Unbiased research added that employees could be boosting their pension pot by as much as £602 each, and £2.5bn collectively, through tax relief on contributions.
It explained anyone paying towards a pension receives tax relief on their pension savings at 20% and up to 40% or 50% as appropriate.
Higher rate taxpayers could benefit from saving into a pension potentially adding up to £1,204 in tax relief. Under current rules when you pay money into a pension, the government effectively adds an extra 20% of the total contribution.
In practice, this means that for every £100 you want to save, you only need to contribute £80 of your own money (and £60 for a higher rate tax payer and £50 for an additional rate tax payer respectively).
Karen Barrett, chief executive of unbiased, said:
“Saving into a pension can be one of the most tax efficient methods of saving for retirement, however people rarely think about the tax benefits. Tax relief on pension contributions is free money available to you, helping you to boost your retirement pot.
“The effect of tax relief on pension payments over time can be considerable but proactivity is vital to ensure consumers are making the most of these tax-efficient saving vehicles.”
Barrett said this was even more important for higher rate taxpayers – where the onus is on them to claim back the additional tax relief owed.
“The sooner you start saving, the more time you have for your money to grow. A discussion with an IFA is a good way to ensure you are planning effectively for retirement and can help put your financial affairs in order,” she added.