Despite the huge attraction of tax relief, an independent study by the Prudential has revealed that one in four tax payers who pay the higher rate don’t contribute to private pension schemes. As this tax relief can boost retirement savings, there are currently in the region of 216,000 employees potentially missing out on as much as £438m every year in their pension tax relief.
Their nationwide study concentrated on those who earned between £42,275-£149,999, and found that 21% claimed that they couldn’t afford to make regular contributions into a pension scheme. 13%, or one in eight, said that they see no point in saving for their retirement, despite the obvious tax benefits that pensions bring, while 17% admitted that they don’t actually know why they don’t contribute to a pension scheme.
An average higher rate taxpayer contributing £425 a month into a pension fund receives basic rate tax relief of £85 a month or £1,020 a year, directly into their pension fund. Up to an additional £1,020 a year in higher rate tax relief can be claimed, which could also be used for pension saving.
Figures from HMRC show that around 58 per cent of the estimated 900,000 higher rate taxpayers in the UK contribute to defined contribution pension schemes, while another 15 per cent are members of either non-contributory or defined benefit schemes.
But despite earning average salaries of £58,541, the rest do not save into pension schemes at all. Around 43 per cent of those who don’t save into a pension scheme claim to have made alternative retirement arrangements, 4 per cent have existing Self-Invested Personal Pension schemes and another 2 per cent claim they will not retire.
Matthew Stephens, Prudential’s tax expert, said: “Pension saving offers valuable tax reliefs to all workers and particularly to higher rate taxpayers. Basic rate 20 per cent tax relief is available at source plus up to an extra 20 per cent from HMRC for higher rate taxpayers. Turning down what is effectively free money simply does not make sense.
“It is worrying that so many higher rate taxpayers say they cannot afford to save into a pension despite earning healthy salaries. The good news is that it is never too late to take action on saving for retirement and we urge all workers to seek advice on long-term retirement planning.”
The Prudential research shows that recent changes limiting annual tax-free pension contributions to £50,000 a year have not significantly dented pension saving among higher earners. Just 8 per cent said the change had put them off pension saving while 25 per cent were unaware of the change.