Less than a quarter of pension savers would support a move to pension Isas where there is no incentive to save other than tax-free growth and withdrawals, according to research from Aviva.
Research commissioned by the provider found 41 per cent supported an Isa style system where contributions are paid from taxed income, but withdrawals in retirement are tax free. But that figure fell to just 23 per cent when it was explained to people that an Isa approach without an incentive would lead to them paying more tax. Under an Isa, 100 per cent of contributions are subject to income tax and national insurance, whereas under a pension, national insurance is not payable on employer contributions and income tax is payable on only 75 per cent of the benefits withdrawn
The number of people in favour of the current system of tax relief – pension contributions are tax free but withdrawals in retirement are taxed – rose from 20 per cent to 34 per cent where it was explained the Isa option would see them pay more tax.
Aviva’s research showed there is still limited understanding of how Isas work. Almost 60 per cent of people surveyed failed to correctly identify how Isas are taxed. Over 55s were the most aware with half of those asked understanding how the savings accounts are taxed. That figure fell to less than a quarter for under 25s.
The survey also found a majority of people understood ‘Buy 2 get 1 free’. More than half opted for the slogan when it was put alongside other terms such as ‘pension tax relief’, ‘taxed at your marginal rate’ and ‘flat rate of pension tax’.
Aviva CEO UK & Ireland life Andy Briggs says: “Our research again shows that people are confused. Pensions and the tax system around them can be difficult to understand and that can act as a barrier to people saving more for their retirement. The figures show that two thirds of people didn’t realise that at least £20 out of every £100 in their pension comes from the Government.
“This is why at Aviva we are calling for the tax relief system to be made fairer and simpler. We need to remove different rates of relief for different incomes and offer everyone a flat rate of 33 per cent.
“Once that is in place we need to make it easier for people to understand. Just call it “Buy 2 get 1 free” so everyone knows that each time they pay £2 into their pension the Government will add £1. It’s a simple, clear and fair incentive for all savers.”
“Many people have heard of ISAs and many will probably feel quite comfortable with it being associated with pension saving,” said Andy Briggs. “But as the survey suggests, most people don’t know how they work and when they do, their support drops.
“Showing that younger people are least likely to be clear on how different saving products work is important. The younger someone starts saving for a pension, the more money they are likely to have when they come to retire, and the less likely they are to need to put away huge chunks of their salary in their 40s, 50s and 60s.
“I’m pleased that people have backed our ‘Buy 2 get 1 free’ initiative as it is a cornerstone of what we are trying to achieve – making pension saving simpler, fairer and more attractive.”