Half of Brits do not realise that the government boosts any payments they make into private pensions, according to a new survey from Blackrock.
Tax relief on pension contributions effectively means the government will repay the tax you paid on your earnings into your retirement savings on your behalf. This means it only costs basic rate taxpayers £80 to invest £100, while higher rate taxpayers only need to pay £60 to save the same amount (as they paid more tax in the first place).
Unsurprisingly, a quarter of the 4,000 people aged between 25-74 surveyed, said that if they knew the government was topping up their contributions they would pay more money into their pension.
Currently Brits are paying a typical 2% of their earnings into their pension every year. Based on the average annual salary of £27,000, that means they are getting £135 a year from the government in the form of tax relief. If they were to increase their contribution to 5% of their earnings, the government would pay in £13,520 over 40 years – equivalent to £28 every month or £336 a year.
The survey also found that Brits are underestimating how much money they will need to live off when they retire. The average person says they would like an income of around £26,000 a year and expect they will be able to generate that with a pension worth £233,000.
However, the reality is that to generate an income of £26,000 a year savers would actually need a pot worth closer to £550,000 – even once the state pension has been take into account.
Only saving more and taking advantage of tax relief on pension contributions will help people bridge that gap.
The Department of Work and Pensions recommends workers pay a total of 15% of their earnings into their pension – if they were to do this they would get more than £1,000 a year in tax relief from the government, amounting to £40,000 over their working life.
‘Every pound invested now can affect what your life looks like in retirement’
Claire Finn, head of UK defined contribution pensions at BlackRock, says: “While it is surprising that half of Brits are not aware that the government already supplements their pension savings, our survey shows promise – people would contribute more if they knew the government was contributing too.
“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. The good news is that six in 10 people are already saving for retirement and could be boosting their pension even further. Increasing their personal contribution to 10% of their monthly salary would see government tax relief rise to £27,000 over 40 years.”
The table below shows how much contributions from the government can help to top up your pension.
|Individual contribution to workplace pension||Annual salary contributed to pension (based on average UK salary of £27,000 per annum)||Government tax relief contribution (annually)||Total contribution of government tax relief over 40 years|