Millions of taxpayers are missing out on substantial pension savings, potentially losing “hundreds of thousands in retirement”, an investigation has found.
For those saving £400 monthly into their personal pension, the oversight could reduce their retirement pot by £350,000.
More than 2.3 million higher and additional rate taxpayers are missing out on substantial pension savings by failing to claim their full tax relief entitlement, analysis by investment platform InvestEngine has found.
The research reveals that failing to claim relief, combined with account fees, could slash potential pension values by half over a 40-year period.
For those saving £400 monthly into their personal pension, the oversight could reduce their retirement pot by £350,000, potentially forcing them to work longer into their later years.
Over half of the 7.44 million people paying higher or additional tax rates currently contribute to a personal pension, making them eligible for pension tax relief.
Around 46 per cent of these pension holders are not claiming their pension tax relief on contributions
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This equates to approximately 4.9 million adults earning £50,271 or more who are paying into schemes such as self-invested personal pensions (SIPPs).
However, InvestEngine’s research reveals that 46 per cent of these pension holders are not claiming their pension tax relief on contributions.
Andrew Prosser, Head of Investments at InvestEngine, said: “We know that as a whole people in the UK aren’t saving enough for the retirement they want, but those who are able to put away good sums may still be losing out by not claiming all eligible tax relief while being hit with high fees.
“Over time this could reduce pension pots by hundreds of thousands of pounds. Those paying the higher rate of tax and contributing to a personal pension should ensure they are claiming back all eligible tax from HMRC, while checking their pension providers’ fees to see whether they could be getting a better deal elsewhere.”
Between 2016 and 2021, HMRC data shows £1.3bn of tax relief went unclaimed, highlighting the scale of missed opportunities for retirement savings. Most workplace pension schemes collect contributions from gross income, meaning tax relief is automatic.
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However, personal pensions typically receive contributions after income tax has been deducted, with pension schemes automatically collecting only the 20 per cent basic rate relief from HMRC.
This means higher rate (40 per cent) and additional rate (45 per cent) taxpayers must take extra steps to claim their full entitlement.
The balance of relief due to these taxpayers is not automatically collected, requiring them to file a Self Assessment tax return with HMRC to claim the additional relief.
A higher rate taxpayer contributing £400 monthly over 40 years would accumulate £192,000 in their pension pot. The Government automatically adds 20 per cent tax relief, worth £1,200 annually or £48,000 over four decades.
By claiming additional higher rate relief through Self Assessment, they could secure another £1,200 yearly, potentially adding £108,000 more to their pension over 40 years.
For those investing the maximum tax-free amount with seven per cent annual growth, claiming full relief could result in a £1.6m pension pot, while failing to claim higher rate relief would reduce this by over £350,000.
The impact of fees compounds the problem of unclaimed tax relief, with even a modest one per cent annual fee reducing a portfolio’s final value by 24 per cent over 40 years.
A two per cent annual fee would cut the final pension value by 41 per cent, regardless of contribution levels.
The combined effect of unclaimed tax relief and a one per cent fee over four decades could be devastating, potentially halving a £1.6 million pension pot to less than £800,000.
HMRC’s is urging higher and additional rate taxpayers to ensure they claim all eligible relief
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InvestEngine has responded to this issue by removing all account fees on its SIPP for current and new customers.
Higher and additional rate taxpayers have two options for claiming their pension tax relief. They can either submit an online Self Assessment tax return through the GOV.UK website. Alternatively, they can contact HMRC directly to claim their entitlement.
InvestEngine has launched a tax relief calculator to help those with personal pensions work out how much relief they could be entitled to on their contributions.
The platform is urging higher and additional rate taxpayers to ensure they claim all eligible relief and consider making additional contributions to boost their retirement funds.
