Britons are being urged to make the most of tax relief to boost their pension savings after millions of people are estimated to be at risk of not maintaining a “minimum” standard of living in retirement.
According to a new analysis by Scottish Widows, a startling 38 percent of the population is potentially off-course in achieving even a basic lifestyle post-retirement, equating to 1.2 million people.
The minimum standard for retirement income is defined as having enough to cover basic needs with some left over for leisure. For example, this includes affording a one-week UK holiday and having £50 per week to spend on groceries, or £95 for a couple.
It assumes that the individual would also not own a car. The rise in those projected to fall short of this minimum standard has been driven by increasing living costs, such as surging rents.
Brian Byrnes, head of personal finance at Moneybox said: “We are sleepwalking into a retirement crisis, and without systemic changes to how we interact with consumers now, many are inevitably facing a future where they will not have enough saved for a comfortable retirement.
“Our research earlier this year found that just one in 10 people are very confident that they are on track for a comfortable retirement, and only 21 percent have worked out how much they would need to save in order to achieve their ideal income in retirement.”
Adrian Lowery, financial analyst at wealth management firm Evelyn Partners, explained: “One of the few ways out of this quandary is to start saving more, and that will probably mean cut-backs elsewhere, but one great advantage on the side of savers in the UK is pension tax relief.
“Even in middle age, using space in one’s annual allowance to boost pension contributions can have a profound effect on the size of one’s pension pot in a decade or two’s time.”
What is pension tax relief?
Pension tax relief is a Government incentive where contributions to a pension scheme receive tax benefits, effectively reducing the amount of income tax paid by individuals and boosting their overall pension savings.
People can receive tax relief on pension contributions of up to 100 percent of their annual earnings, subject to Annual Allowance restrictions.
The Annual Allowance for tax relief on pension savings in a registered pension scheme is £60,000 for this tax year. This means people will pay tax if their annual pension savings exceed this amount. However, a person’s Annual Allowance may change if they’re a higher earner.
Explaining how the relief works in practice, Zoe Till, investment director and chartered financial planner at Nelsons Solicitors, previously told Express.co.uk: “Basic rate tax relief is provided at 20 percent from the Government when you make contributions to your pension.
“So, for example, if you want to add £1,000 to your pension, you’d only need to add £800 and the Government would add £200, which is 20 percent of the gross amount.
“Another way of looking at it is that the Government effectively tops up whatever you put into your pension by 25 percent (up to an annual limit).”
Higher-rate and additional-rate taxpayers have to actively claim tax relief on their pensions through either a self-assessment online or by contacting HMRC directly.
