How pension tax relief boosts your retirement fund

There are multiple savings vehicles available, so what separates a pension from a regular savings account, or an ISA? Why lock funds away until you reach 55 when they could instead be immediately accessible elsewhere? There are many reasons, but one of the main incentives is pension tax relief.

What is tax relief?

If you pay into a pension, the income tax deducted from your earnings is returned on those contributions. This boosts the amount in your fund without you needing to save more, and can significantly increase the size of your fund. Basic-rate taxpayers will receive a 20% boost, so for every £80 saved the government will add £20. Higher- and additional-rate taxpayers also receive the 20% pension tax relief, and claim the rest through their tax returns.

  • Save £80 into a savings account or ISA and the fund will be worth £80
  • Save £80 into a pension and the fund will be worth £100
  • Basic-rate taxpayers contribute £800 for every £1,000 in a pension
  • Higher-rate taxpayers contribute £600 for every £1,000 in a pension

Even children can receive pension tax relief

Our recent survey of UK adults between the ages of 33 and 55 found that 60% of people would be deterred if pension tax relief was reduced or removed. For people with incomes over £20,000, this percentage increased to 63%, but dropped to 56% for people with incomes below £20,000 – a possible indication that lower earners are unaware their pension contributions are boosted even if they do not pay income tax.

Tax relief on pensions is so generous that everyone receives it, including children. This allows parents to start a pension for their baby, which other people can also contribute to. A maximum of £2,880 can be saved into a child’s pension each year, which gets boosted to £3,600 with tax relief – an immediate 25% growth.

Setting up a pension for your child gives decades for the money to grow and ensures that it is there for retirement, so it cannot be frittered away during younger years. This is in contrast to Junior ISAs, where the account is accessible by the child from their 18th birthday, and they can spend the money however they wish – which may not be the house deposit you had in mind when opening the account. If you’re considering savings options for your children, we have 5 tips to save for your child’s future without a lot of money.

Pensions have other perks too

We’ve all been there – opening a savings account to put money into each month, only to skip a month or take some money out when something comes up, with the intention of replacing it at a later date. Unfortunately, the money often doesn’t get replaced, and the savings fund is smaller than we’d like. With pensions, the money cannot be accessed until at least the age of 55. What’s more, with the contributions taken directly from our salary, we don’t have to make a conscious decision to save each month, and those contributions are immediately increased thanks to tax relief.

People in workplace pensions will also receive employer contributions, which is essentially free money and further boosts a fund’s size. Consider the following example:

  • You pay £80 into a pension
  • You receive 20% tax relief, increasing the total contribution to £100
  • Your employer matches the £100, increasing your fund to £200
  • In percentage terms, your fund has a 2% contribution for every 0.8% you add

Compared to some other types of savings, pensions have generous benefits that encourage saving and facilitate the growth of the fund, but bear in mind that all taxation is based on your personal circumstances and may change in future.

Does pension tax relief encourage you to save for retirement? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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