More than three quarters of people are unaware that taking part of a bonus as a pension contribution means it is tax-exempt, research by Aviva has found.
A survey of 2,012 adults found just 24 per cent were aware of the bonus exchange rules, that see both income tax and National Insurance waived if the bonus is taken as a pension contribution.
The research, which coincided with the March bonus season, also found just 9 per cent of those who had received a cash bonus in the past had contributed even part of it to their pension.
They were much more likely to spend it on a "treat", such as a holiday or shopping spree, with 39 per cent taking this option.
Those who had never received a bonus were even less likely to pay it into their pension.
Just 5 per cent said they would do so, while 38 per cent said they would spend the hypothetical cash on a treat for themselves.
As part of the research, Aviva explained to the 76 per cent of respondents who didn't understand the tax rules exactly what the advantages of contributing to a pension were.
We want something now, not later, and to some extent that is understandable.Colin WilliamsAviva explained that someone on £27,000 a year who received a £2,000 bonus would end up paying £573.30 in income tax and National Insurance. They would then take home just £1426.70.
A pension contribution, meanwhile, would see them keep the full £2,000.
This had a dramatic effect on people's stated intentions, with a third saying they would "definitely" opt to pay at least part of their bonus into their pension.
Only 27 per cent said they would still take it as cash.
Colin Williams, managing director of workplace benefits at Aviva, said the research revealed a culture of "instant gratification".
"We want something now, not later, and to some extent that is understandable. But it’s clear that a large number of people are missing out because they don’t understand how pensions work," he said.
"Tax relief along with an employer pension contribution are the two biggest reasons to pay into a workplace pension. If people don’t recognise the value of these then they are not able to make an informed choice when they are offered a bonus. This knowledge gap is creating a savings gap."
He said the research highlighted the need to educate people.
james.fernyhough@ft.com
