Retirement savers do not understand how pensions work and are losing valuable cash to fund their later years, according to new research.
Failing to put enough money into a pension is costing savers money – and the main reasons they do not save more is lack of knowledge and confusion because products are complicated and finance industry terminology is hard to interpret.
The conclusion drawn by investment house BlackRock is people would save more if the benefits were better communicated to them.
A survey of 4,000 people revealed half the working population did not realise the government topped up their pension contributions with tax relief.
This adds up to 16 million people.
Tax boost for pensions missed
More than a quarter (27%) said they would have increased their savings had they known about the tax boost.
Workers pay 2% of their average £27,000 annual salary into a pension – which is topped up by £135 by the government.
Raising pension contributions to 5% of salary would generate tax relief of £28 or £13,520 over 40 years, while a hike to 15% of salary would see the government pay more than £1,000 a year or £40,000 over their working life.
Disappointingly, the salary also found that despite publicity, 48% of workers did not know what auto-enrolment pensions were and 40% did not know what a defined contribution pension meant.
Auto-enrolment is the government workplace pension scheme, while a defined contribution pension offers a retirement income based on investment performance rather than a guaranteed income based on length of service and salary.
Unaware of pension details
Claire Finn, head of UK defined contribution pensions at BlackRock, said: “While it is surprising that half of Brits are not aware that the government already supplements their pension savings, our survey shows promise – people would contribute more if they knew the government was contributing too.”
David Fairs, pensions partner at KMPG argued the problem is tax relief is complicated and not at all understood.
“Expressing tax relief as a matching contribution would make the government contribution more easily understood.
“Auto-enrolment has been successful in getting non-savers to save but they rarely understand the detail.”