Fundamental aspects of pensions remain a mystery to many people, according to new research from Royal London, after 27% of people admitted they have never heard of tax relief.

Findings from the mutual insurer showed that only 15% of those surveyed said they fully understood how tax relief on pension contributions works, while a further 31% said they had some understanding. The remaining 27% revealed they had heard of pensions tax relief but did not know how it worked.

The research, based on a study among 2,000 UK adults, indicated that differences in understanding are particularly acute between men and women, with 33% of women having no knowledge of tax relief in comparison to 20% of men. A further third (33%) said they had some understanding of how pension tax relief, compared to 59% of men.

Royal London stated that once people had a better understanding of how pensions tax relief works, the data indicated that it made them view pensions more positively and could even lead to them contributing more towards their pensions over time. Overall, almost a third (32%) said they now viewed pensions more positively, while 25% said they would be more likely to increase pensions contributions as a result.

Other areas of pensions tax relief causing confusion included the ability to pay contributions for another person, as well as the use of salary and bonus sacrifice.

Royal London director of policy & external affairs, Jamie Jenkins, said that the research shows how pension tax relief remains “poorly understood”.

Jenkins added: “However, there is a huge positive in that the data shows that once people do understand it better then tax relief has the potential to change how people view their pension, with a significant proportion saying they would be more likely to increase contributions as a result.

“In practice the approach is logical – pensions are taxed as deferred pay – by deferring income for later in life, you also defer any tax payable. There are then additional incentives, such as tax-free investment growth and the tax-free lump sum.

“However, the picture has been complicated by a series of changes to allowances in recent years which has contributed to the confusion on how the system works.”

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