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‘Tax relief doesn’t sound like free money, but it is’

Written by: Paloma Kubiak
Brits miss out on tens of thousands of pounds in their retirement savings as half are unaware the government contributes to pensions outside the usual state provision in later life.

Around 16 million people in the UK don’t know that the government boosts pension contributions in the form of tax relief which is based on your nominal rate of tax (20%, 40% or 45%).

Under current auto-enrolment rules, Brits currently contribute 2% of their annual salary into a workplace pension – made up of 1% from the employee and 1% from the employer.

Based on an average annual salary of £27,000 (basic taxpayer), an extra £135 is added to the pension from the government through tax relief, according to BlackRock.

If people were to increase payments and save 5% of their annual salary, they stand to gain £13,520 in pension tax relief over 40 years, amounting to £28 per month.

According to BlackRock’s Investor Pulse survey of 4,000 men and women aged 25 to 74, a quarter said they would increase contributions if they knew the government topped it up.

The table below shows the amount of government tax relief available to basic rate taxpayers based on their contributions:


The fourth annual BlackRock survey also revealed Brits want an annual retirement income of £26,000 and believe a total pension pot of £233,000 is enough to achieve this. However, they will need closer to £550,000, even after taking into account the State Pension.

The survey also found that the number of people saving for retirement has plateaued in the last two year, with 40% saying they’re not saving for retirement. Of those currently not saving, two-thirds do not have any pension provision in place and half said they don’t have enough money to save. A fifth said they have other priorities.

Claire Finn, head of UK DC pensions at BlackRock, said: “With the cost of living going up, it can be hard to save for something that’s years away. However, every pound invested pre-retirement can have an exponential effect on what a person’s life looks like in retirement. Increasing their personal contribution to 10% of their monthly salary would see government tax relief rise to £27,000 over 40 years.

“Education is paramount if we want Brits to save more, especially since we are all living longer and the responsibility of pension provision continues to shift from the state to the individual.”

She added there are a number of levers that can be pulled to help individuals achieve their retirement aspirations. “Top up your pension in line with inflation or salary increases, work a bit longer or reduce the amount you think you will need. Even if people can’t save right now, everyone should have a plan in place for the future. The sooner you can start saving for retirement, the better.”

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