Workers missing out on tax perk as pension savings fall

More than one in three workers have no form of pension and face relying on the state pension in retirement, a report out today claims.

It also estimates that the average employee not paying into a pension is missing out on more than £330 a year in tax relief. The research is published by insurer Prudential as millions of workers digest a warning that the pension age may rise more quickly than previously expected.

Prudential found that more than 15 million working people in the UK, equating to 35 per cent, have no private or company pension. More than four in ten women have no pension, compared with 29 per cent of men, according to the research. It comes a week after the government’s statistics office reported a sharp decline in pension savings levels. The number of people paying into workplace pension fell by almost half from 6.3 million in 1991 to just 3.2 million in 2009.

And those failing to save are not only heading for a meagre income in retirement, but also losing out on thousands of pounds of tax relief, said the report.

Basic-rate taxpayers making the average pension contribution of 6.2 per cent are entitled to £334 a year in tax relief, amounting to more than £15,000 over their working lives.

Vince Smith-Hughes, head of business development at Prudential, said: “Failing to save into a pension means not only having to rely solely on the state pension in retirement, but also missing out on the ‘free money boosts’ which come with pensions, such as tax relief and employer contributions.”

And even the majority of those that do contribute to a pension don’t know how much they are paying into it, according to a report by Scottish Widows. It found that just 47 per cent of Scots with a defined contribution pension scheme – the type of scheme into which most workers now pay, following the decline of final salary pensions – know how much they are paying in.

And contribution levels are under pressure, with more than six in ten Scots saying they won’t be able to boost their savings over the next year.

Pete Glancy, head of corporate pension propositions at Scottish Widows, said: “For those without a pension, the introduction of auto-enrolment and the National Employment Savings Trust will help improve the savings landscape, particularly for those working for smaller businesses who may not have access to a pension currently.

“However, 75 per cent say they will save under £50 per month, which is significantly less than the amount required for a comfortable retirement.”

Westminster work and pensions secretary Iain Duncan Smith believes the pension age increase timetable proposed by the government – to 67 by 2036 and 68 by 2046 – is too modest. He suggested an automatic mechanism whereby the pension age rises in line with longevity.

The approach would mean the youngest generation of today’s workers retiring at 72 or older unless they save enough to do so before that point, according to PwC.

Chris Massey, head of pensions at PwC Scotland, said: “It’s understandable that, from an individual’s perspective, these announcements can erode their confidence in saving for retirement, but the reality is that now is the very time they should get on top of their retirement savings so they have options aside from the state pension.”