Nearly half of pension savers are missing out on upto £800k
Analysis shows that over 2.3m high-income savers are unwittingly missing out on over £1bn of tax relief on pension contributions.
More than half (56 per cent) of workers in higher or additional rate tax bands have a personal pension, according to research from ETF investing platform InvestEngine.
However, 46 per cent (2.3m people) of that group do not claim pension tax relief on their contributions, meaning a smaller overall retirement fund.
The government automatically tops up any money paid into a personal pension by 20 per cent.
Those paying higher rate tax can claim another 20 per cent, and additional rate taxpayers can claim another five per cent, but this has to be claimed as it is not done automatically.
Andrew Prosser, head of investments at InvestEngine, says not claiming eligible tax relief could “reduce pension pots by hundreds of thousands of pounds”.
Around £1.3bn of pensions tax relief was unclaimed between 2016 and 2021.
A worker saving £400 a month into a personal pension over 40 years could slash the size of their pot by £350,000 by not claiming back tax relief, InvestEngine said.
This, combined with paying yearly account fees of up to one per cent, could cut the pension in half—a loss of hundreds of thousands of pounds.
A yearly account fee of 1 per cent will slash the value of a pension pot by 24 per cent over 40 years, while a 2 per cent fee cuts it by 41 per cent, regardless of how much is paid in.
The double whammy of yearly fees and not claiming eligible tax relief could halve a £1.6m pension pot over 40 years to less than £800,000.
Prosser said many savers putting away “good sums” for their retirement are still losing out by not claiming tax relief.
He said: “Over time, this could reduce pension pots by hundreds of thousands of pounds. Those paying the higher tax rate and contributing to a personal pension should ensure they are claiming back all eligible tax from HM Revenue & Customs, while checking their pension provider’s fees to see whether they could be getting a better deal elsewhere.”
Savers can claim tax relief on pensions through a self-assessment tax return.
Those with a personal pension can make backdated tax relief claims for up to four years.