Pension contributions – are you missing out on free money?

Pension contributions – are you missing out on free money?

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Gary Smith
Published: 17 Jul 2017 Updated: 31 Jan 2023

The Government tops up your pension contributions

Anything you pay into your pension will be topped up by the Government, up to your annual allowance (usually £40,000). Everyone receives basic-rate tax relief of 20% – so a gross contribution of £1,000 would only cost you £800.

Higher and additional-rate taxpayers can then claim back a further 20% or 25% respectively – bringing the total cost of a £1,000 contribution down to as little as £550.

A big difference to your investment returns

The effects of this initial tax relief can be amplified over time if we consider your investment returns. Let’s assume that you paid £800 into your pension and received basic-rate tax relief, bringing the total contribution up to £1,000.

If your investment grew 10% in a year you would have £1,100. If you didn’t get tax relief – for example by paying the money into an ISA instead – you would have £880 and be £220 worse off. Over the course of a long-term investment like a pension, this can make a huge difference.

16 million people are unaware of tax relief on pension contributions

Clearly this top up to pension contributions can make a big difference to your savings over time, and yet many people are unaware of it. Research from Blackrock has revealed that a massive 16 million British people were in the dark when it comes to pension tax relief*.

This isn’t a new issue either. The Government’s consultation on altering pension tax relief has previously highlighted the fact that many Brits weren’t aware of the benefits. This begs the question – how much tax relief has potentially been missed out?

Speak to a financial planner about your retirement savings

Tilney’s financial planners spend their days helping people with their retirement planning and wider finances. They can give you advice on:

  • How much money you may need in retirement, and whether you are on track to achieve this
  • Making the most of your allowances and using pension carry forward
  • Protection against the pension lifetime allowance tax charge

To find out what they could do for you, please book a no-obligation consultation by completing this online form, calling us on 020 7189 2400 or emailing contact@tilney.co.uk.

Disclaimer

This article was previously published on Tilney prior to the launch of Evelyn Partners.