Two thirds don't understand pension tax relief

One in 10 surveyed had never heard of pension tax relief, while almost half believe the language used when it comes to pensions is unclear and difficult to understand.

But 12% thought their understanding of pensions had improved since the pension freedoms were launched earlier this year.

Those aged over 55, the age group most directly affected, were most likely to say their understanding had improved, providing a sign that making pension saving more engaging can help to capture people’s interest.

The findings come as Aviva has reiterated its proposals for incentivising retirement saving. The insurer is calling for savers to get a flat rate of incentive from the government, regardless of their earnings, and for the term ‘pension tax relief’ to be scrapped.

Andy Briggs, CEO UK & Ireland Life at Aviva, said:

“The research we’ve done shows that nearly two thirds of people don’t really understand tax relief and 1 in 10 have never even heard of it.

“Let’s call it what it is – the government’s contribution to your pension. Matched contributions have been shown to incentivise savings and the current system can be redesigned to give a simple accompanying message of ‘buy 2 get 1 free’ so for every £2 someone contributes to a pension the government will contribute £1.

“This is fair and doesn’t give the biggest incentives to those earning the most, which is how the current system works. It is often affordability that holds many people back from making increased contributions so our proposal recognises that people need a clearer up front incentive to encourage long term savings. In contrast, in an ISA system all of the tax is paid up front, along with the contributions. Affordability becomes a real issue here as many savers will have to pay upfront tax and national insurance on the contributions made by their employer during their working life, rather than just paying income tax on the benefits they receive when they retire.

“I believe ‘buy 2 get 1 free’ is clear, simple and demonstrates the financial benefit of paying into a pension.

“A pension can be one of the biggest investments a person makes in their life. If they don’t understand the incentive to save that is being offered then this needs to be changed. It’s no wonder many people question the value of saving into a pension when two thirds admit they have very little understanding of the current system of pension tax relief.”