New research has found that more than 2.3 million high-income savers are unknowingly missing out on more than £1 billion in tax relief on pension contributions. According to a study by ETF investing platform InvestEngine, over half (56%) of workers in higher or additional rate tax bands have a personal pension.
However, 46% (equating to 2.3 million people) of this group fail to claim pension tax relief on their contributions, resulting in smaller overall retirement funds.
The government automatically increases any money paid into a personal pension by 20%. Higher rate taxpayers can claim an additional 20%, and additional rate taxpayers can claim an extra 5%, but these must be claimed manually as they are not automatically applied.
Andrew Prosser, head of investments at InvestEngine, warns that failing to claim eligible tax relief could “reduce pension pots by hundreds of thousands of pounds”. Between 2016 and 2021, approximately £1.3 billion of pensions tax relief went unclaimed.
InvestEngine calculates that a worker saving £400 per month into a personal pension over 40 years could reduce their pot by £350,000 by not claiming back tax relief. This, coupled with annual account fees of up to 1%, could halve the pension—a loss of hundreds of thousands of pounds, as reported by City AM.
An annual account fee of 1% will decrease the value of a pension pot by 24% over 40 years, while a 2% fee reduces it by 41%, regardless of the amount paid in.
The combination of annual fees and failure to claim eligible tax relief could potentially reduce a £1.6m pension pot to less than £800,000 over a 40-year period, according to Prosser. He highlighted that many savers who are setting aside “good sums” for their retirement are still missing out by not claiming tax relief.
Prosser 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.”
Pension savers can claim tax relief through a self-assessment tax return. Furthermore, those with a personal pension can make backdated tax relief claims for up to four years.