We all know the importance of saving for retirement, but many people fail to realise that saving into a pension could provide shorter-term benefits, too, namely in the form of tax relief. This is particularly true of higher earners, and failing to contribute to their pension could mean they miss out on thousands of pounds in tax relief over their working life.
Research from Prudential has found that a large number of higher rate taxpayers are missing out on tax relief by failing to make sufficient pension contributions, with 23% not making any contributions at all. This could have a significant financial impact – based on the average annual earnings of a higher rate taxpayer of £50,200, making pension contributions of just 5% of their earnings would reduce their annual tax bill by around £1,000. By failing to contribute, they're effectively giving an extra £1,000 to the taxman every year when there's no need to!
Even those who do contribute may not be benefitting fully, as of those higher rate taxpayers who make contributions, 23% are unsure whether they reclaim the full amount of tax relief they're entitled to (higher earners who are members of certain personal pension schemes have to reclaim the additional relief themselves, with members only receiving basic tax relief of 20% automatically). Prudential's calculations show that a higher rate taxpayer who fails to claim this additional 20% relief would sacrifice an extra £500 per year, again assuming typical earnings and contributions.
Clare Moffat, a tax expert at Prudential, commented: "Many people go to great lengths to make everyday household savings that could amount to only a few pounds. While that is not insignificant, they could bank many hundreds of pounds a year simply by fully utilising the tax relief available on certain pension contributions.
"With an annual average of £1,000 in tax relief available to higher rate taxpayers, it makes sense for people to maximise their contributions and make sure they're getting all the relief they are due. Additionally, those who make regular pension contributions will potentially receive valuable employer contributions, and therefore benefit from an even greater boost to the eventual value of their retirement pot."
So, if you're a higher earner, don't forget about that all-important pension. Contributing could reduce your tax bill by an average of £1,000 per year while ensuring you'll have a comfortable savings pot for retirement, so with both short-term and long-term financial benefits, doesn't it make sense to get saving?
Of course, those on lower incomes shouldn't shy away from contributing, either, as everyone can benefit from tax relief and the knowledge that they'll have a decent pension fund waiting for them. Knowing that you won't have to suffer financially in the future can provide valuable peace of mind, and if you combine your pension with additional savings vehicles (such as ISAs or fixed rate bonds) you can grow your retirement pot even more! So, don't lose out – start saving properly and see if you can reap the rewards.
Find the best savings rates
Compare the best cash ISA rates
Best fixed rate bonds for savings
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
Moneyfacts.co.uk will, like most other websites, place cookies onto your computer’s
hard drive. This includes tracking cookies.