A quarter (25 per cent) of people are more likely to increase pension contributions after learning about how pensions tax relief actually works, according to Royal London.

Research from the firm found that learning about tax relief made almost a third (32 per cent) of people feel more positive about pensions, although knowledge levels currently seem lacking as more than a quarter (27 per cent) of respondents admitted that they have never even heard of tax relief.

Only 15 per cent of those surveyed said they fully understood how tax relief on pension contributions works, while a further 31 per cent said they had some understanding and the remaining 27 per cent said they had heard of pensions tax relief but did not know how it worked.

The research appeared to reveal a knowledge gap between genders, with one-third (33 per cent) of women having no knowledge of tax relief in comparison to a fifth (20 per cent) of men.

A third (33 per cent) of women said they had some understanding of how pension tax relief worked, compared to almost three in five (59 per cent) men.

Furthermore, Royal London’s research showed that 60 per cent of respondents were unaware they could contribute to the pension of a spouse or child to enable them to benefit from the tax relief as well as the boost to their pension contribution.

Respondents were also largely unaware of salary and bonus sacrifice, with 52 per cent and 62 per cent respectively saying they had never heard of the terms.

Royal London director of policy and external affairs, Jamie Jenkins, said: “This research shows how pension tax relief remains poorly understood with only 15 per cent of people saying they have a full understanding of how it works.

“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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