Public support for using an Isa-style tax approach to pension saving almost halves when the tax implications are explained, according to Aviva research.
An August poll of 2,000 working UK adults found 41 per cent of people opted for an Isa-style system, where contributions are paid from taxed income, but withdrawals in retirement are tax free.
However, when it was explained that under this system most people would end up paying more tax, that figure fell to just 23 per cent.
In contrast, the number of people in favour of the current system of tax relief (pension contributions tax free, but withdrawals in retirement taxed) rose from 20 per cent to 34 per cent once the tax implications of pension-Isas were explained.
Andy Briggs, chief executive of UK and Ireland Life at Aviva, said two thirds of people did not realise that at least £20 out of every £100 in their pension comes from the government.
He said that is why Aviva is calling for the tax relief system to be made fairer and simpler, with everyone receiving 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 two get one free’ so everyone knows that each time they pay £2 into their pension the government will add £1.”
While the term Isa has now become common, Aviva’s research showed there is still limited understanding of how they work, with almost 60 per cent of people surveyed failing to correctly identify how they are taxed.
Over 55s were the most savvy when it came to Isas, with half of those asked understanding how the savings accounts are taxed - a figure which fell to less than a quarter for under 25s.
Aviva’s survey also found, that when compared to some of the current terminology used around pension tax relief, the majority of people felt they could most easily grasp buy two get one free.
David Trenner, technical director of Intelligent Pensions, said the results of the survey will come as no surprise to people working in pensions.
He said the government’s so called ‘simplification’ introduced new complexities, with the result that the average person who uses an adviser does not ask for a detailed explanation of the tax treatment of the various savings options; they just ask which is best for them.
“The FCA expects an independent adviser to do an analysis of all available savings vehicles before recommending a £50 per month personal pension, that is why we restrict our advice to those with larger amounts.”
emma.hughes@ft.com
