Brits miss out on £720m pension tax relief

Posted on: 16 June 2009 by Gareth Hargreaves

Brits saving for retirement are missing out on an extra £720m by not making additional pension contributions.

Research from, an independent financial advice website, has found that UK workers in company pension schemes are missing out on huge sums by neglecting to save more tax-efficiently.

As a result, higher-rate taxpayers, who are members of their employers' occupational pension schemes will miss out on an extra £720m in tax relief this year by failing to make Additional Voluntary Contributions (AVCs).

AVCs run alongside employers' pension schemes and allow employees to pay extra contributions over and above their standard monthly retirement savings, which could help build up a far larger pension pot for retirement.

For the vast majority of people the annual pension savings limit is 100% of salary.

So technically, if you earned £50,000, you could put away that amount a year into your pension pot, however, people earning over £150,000 my find their permissible pension contributions restricted by the recent Budget announcements.

There are two kinds of AVCs. The first type, added years AVCs, allows you to buy extra years service in your employer's final salary scheme.

So if you agree to pay a set amount you can usually get up to an extra five years service. So instead of retiring with just 20 years service, you can retire with 25 years.

As you are getting final salary benefits by contributing to these plans, if you have one available, it is probably your fist port of call for additional pension savings.

One word of caution though because AVCs buy you extra years in the final salary scheme, if your employer goes bust you may find yourself falling back onto the Pension Protection Fund for compensation.

In addition, the dramatic decline in final salary schemes means there are not many of these kinds of AVC around anymore.

The second type of AVC is a money purchase AVC. These allow you to contribute to a pension pot separately from your employer, usually with an insurance company.

Your fund options are usually limited and you might be paying high costs for these contracts, so since A-Day, in April 2006, when the Government overhauled the UK's pension regime, they have really been replaced by stakeholders, personal pensions and Sipps. All of these typically offer the same kind of benefits at a cheaper cost and/or with more fund options.

But there are still substantial benefits for extra contributions, for example, a 40-year-old man contributing an extra £200 a month to a stakeholder, personal pension or Sipp could expect an extra £4,500 of income per year in retirement.

Laith Khalaf, of Hargreaves Lansdown, an independent financial adviser, says: "Almost everyone should consider topping up their standard workplace pension provision. Making additional contributions to a Personal Pension or Sipp gives you an extra layer of pension income, which is particularly valuable when you consider that most private sector workplace schemes will only replace about a third of your salary in retirement."

David Elms, of Unbiased, adds: "Failing to save for retirement has become an increasing problem for the UK population. The onset of the credit crunch has further compounded this problem as the value of people's pension funds is decreasing and they are also finding their money doesn't go as far as it used to."

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