To encourage people to save for retirement, the government will pay tax relief on your pension contributions. Which means that your pension provider can claim tax back from HMRC and then add that amount to every contribution you make.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Understanding tax relief
It seems that over one quarter (27%) of respondents to a Royal London survey weren’t aware of this pension tax relief. Even less – 15% – of those surveyed said they fully understood how tax relief on pension contributions worked. 31% said they had some understanding and the final 27% said they’d heard of pension relief but didn’t know how it worked.
These findings suggest that if people have a better understanding of how pensions tax relief works, they might see pensions more positively. A more positive outlook could spark an increase in contributions to their pensions over time.
In fact, nearly one-third (32%) said they did now view pensions more positively, and 25% said they would be more likely to increase pensions contributions as a result of their better understanding.
There are other areas of pensions tax relief that have caused confusion.
For example, did you know you have the ability to pay contributions for another person, as well as use of salary and bonus sacrifice?
Among respondents, a surprising 60% said they were unaware they could contribute to the pension of a spouse or child, which would then allow them to benefit from the tax relief on top of the boost to their pension contributions. There were similar levels of awareness concerning salary and bonus sacrifice, with 52% and 62% respectively saying they had never heard of the terms.
Tax relief arrangements
The type of pension you are saving into will dictate the way you claim tax relief. Some workplace pensions use a ‘net pay’ arrangement that won’t require you to do anything to receive your full tax relief. Personal pensions and some workplace pensions use ‘relief at source’ which means that your employer will take 80% of your contribution from your after-tax salary and then your pension scheme will send a request to HMRC to pay an additional 20% tax relief into your pension pot.
Improve your retirement investment strategy
Pensions can be a complicated aspect of your financial plan to deal with. There are so many things to take into consideration, which might often change such as your family circumstances, pension rules, and tax regulations.
NHS pensions and tapered allowance affect many medical and dental professionals and these can equally be difficult to navigate!
No matter your financial situation, or where you are in your career, we can help you make the decisions that are right for you. Get in touch with us today.
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