I have a namesake who is an astrophysicist (hello Carole!). I don’t know why this amuses me so much – it is hardly to my credit that I have so little knowledge or understanding about either astronomy or physics. And yet, for me, this is an area that feels so far out of my reach (in every sense of the word) that I don’t even think I have to try.
I am acutely aware that there are many, many people who feel the same way about finance and, in particular, about pensions and tax.
What does the nation know about pension tax relief?
It seems I’m not the only one to have noticed this lack of understanding: a large pension provider recently commissioned a survey* that sought to quantify just how good a grip the British public has on the subject of ‘pension tax relief’.
Turns your brain into scrambled eggs
Just those three little words alone can turn an ordinarily calm and ordered brain into scrambled eggs – especially in someone who has unsuccessfully attempted to understand what it is and how it works. The technical details of pension tax relief make it hard to grasp. Consequently, unless there is a pressing need to get our heads around the subject, we are likely to decide it isn’t really for us and quickly move on to whatever walk of life we do feel comfortable with.
Women, it seems, know less than men
I have no reason to believe that this is more the case for women than for men and so the following finding from this particular survey made me pause:
“Differences in understanding are particularly acute between men and women, with one third (33%) of women having no knowledge of tax relief, in comparison to a fifth (20%) of men. A further third (33%) of women said they had some understanding of how pensions tax relief worked, in comparison to almost three in five (59%) men.”
How do we explain that?
If you asked me to divide the world into two different groups on the subject of ‘understanding pension tax relief’, gender would not be the first thing to spring to mind. In fact, I would probably start by putting those people who have a working knowledge because of their job or their studies in one camp, and those who do not in the other. Now, there might well be a male dominance in the upper chambers of financial services, but I doubt that that alone could explain why more men than women understand pension tax relief.
An invisible Influencer
I suspect the work of an invisible Influencer here: Confidence.
Confidence is a funny old thing. In a situation where someone has little or no knowledge, a healthy dollop of confidence can allow them to admit to their ignorance without shame or embarrassment (I can tell you now, in all confidence, that I will never be writing on the subject of astronomy or physics as I am genuinely without knowledge on these topics!). That said, if I accidentally found myself at an astrophysics conference where it was clear that no one in their right mind would sign up for such a thing without at least a smidgen of understanding, I could see how the fear of seeming foolish at best – and plain ignorant at worst – might push me into pretending to have more knowledge than I do.
A little bit of knowledge
And then you have the type of situation where someone’s confidence allows them to believe that they are knowledgeable – even when they’re not. This would be the sort of person who, having once read the headlines of Astrophysics Weekly whilst queuing at the newsagents to buy gum, would consider themselves well informed enough to tick the ‘some knowledge and understanding’ box in a survey.
A basic understanding is enough
Forgive the scepticism, but when I read that 33% of women have “no knowledge of tax relief” in comparison to 20% of men, I can’t help wondering about the context. Labels and jargon can be powerful detractors from our levels of confidence – and presenting someone with a short-hand label such as ‘pension tax relief’ can really throw someone who has been stopped in the street mid-way between the chemist and the library. Yes, the rules around pensions can be complicated when you seek to understand them in their minutiae. But, for most people, an understanding of the principle is enough. I wonder if the survey would have shown the same gender-divide in the results if the question had been phrased differently. Let’s try this:
What does pension tax relief mean?
- When you put money that you have earned into a pension, you don’t have to pay income tax on that amount
- The nice feeling you get when someone stops talking about pension tax
A number of factors at play
Okay, I admit this would not pass any rigorous statistical analysis, but the point is that, when you ask someone how much they understand about how tax relief works on pensions, there are going to be a number of factors at play. For some, not wanting to appear ignorant will influence their answer. For others, thinking that you have to know every sub clause of the latest HMRC manual on the subject in intimate detail before being able to say that you understand it will likewise influence their answer. And some people will understand the concept perfectly well but simply not know that this is what it is called.
Turning women into a target market
Surveys like these are really useful for highlighting where there is a genuine need for better explanations and communication around everyday financial products like pensions. But the gender-divide in the findings can also have the effect of turning women into a ‘target market’. The thinking being that, if the industry does a bit more education aimed at women, they will come flocking to buy more financial services.
Explanations as well as questions, please
What would be impressive would be if, at the end of a survey like this, anyone who admitted to having no or little understanding of pension tax relief was offered a jargon-free explanation of the basic principles and how it works in practice. (I’ve put something in the ‘A bit more understanding’ section at the end of the post for anyone who thinks this would be a good idea.) And now I come to think of it, this should be offered to everyone who takes part – even those who claim to understand pension tax relief fully – because of course some participants might actually have claimed to know more than they really do (I’m naming no names here).
No fool-proof way to test someone’s knowledge
Collecting data on people’s levels of understanding is never going to be an easy science. Under- and over-confidence in our own knowledge will influence how we answer a survey and – short of demanding a full GCSE paper on the subject – there’s no fool-proof way to test a participant’s knowledge other than asking them outright.
A knee-jerk reaction
I’ve applied this principle to myself and thought about how I would answer a survey that asked if I had any knowledge of astrophysics. My knee-jerk reaction to the science-y name of the subject is to declare that I have no knowledge at all. But, with the help of Wikipedia, I have discovered that I am at least familiar with some of the key players: for example, on a very basic level I understand the relationship between the planets, their moons and the sun; I’ve spent many a summer evening gazing at the Milky Way and wishing on ‘shooting stars’; I’ve bent my brain around the notion that what we see in the sky is historical, not current and I’ve wondered often about how it all came about. Oh, and I’ve visited a chiropractor to sort the crick in my neck out.
I’m practically an expert! Now, where’s that survey…?
* Carried out by Opinium on behalf of Royal London asking 2,000 UK adults what they knew about pension tax
Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Beaufort Financial Planning Limited, Kingsgate, 62 High Street, Redhill, Surrey, RH1 1SH, which is authorised and regulated by the Financial Conduct Authority, FCA Registration No. 583233
This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Beaufort Financial Planning Limited. Financial decisions should not be made on the basis of this article
A bit more understanding
The basic principle
When you put money that you have earned into a pension, you don’t have to pay income tax on that amount.
How it works in practice
There is more than one method of getting pension tax relief, depending on what sort of employment you have and what sort of pension scheme is offered. The explanation below is for what is called a defined contribution type of pension (not a defined benefit, or final salary one).
If you have a workplace pension, either:
- Your contributions will be taken from your pay before your tax is calculated; or
- You will pay tax on all your earnings, but your employer will take 80% of your pension contribution from your net pay and HMRC will put in the other 20%.
If you have a personal pension because you are self employed or for some other reason, you make a payment from your personal means that is equal to 80% of the total contribution you want to make to your pension. The pension provider arranges for HMRC to put in the other 20%.
If you are someone who pays 40% tax on your earnings, the arrangement is the same as for a 20% taxpayer, but you then claim back a further 20% from HMRC on your self-assessment tax form.
Example: You are a 20% tax-payer and you want to put a total of £100 into your pension. You pay £80 from your earned money (ie money that has already been taxed) and HMRC puts in £20
Example: You are a 40% tax-payer and you want to put a total of £100 into your pension. You pay £80 from your earned money (ie money that has already been taxed), HMRC puts in £20 and you claim £20 back through your self-assessment tax form.
A few more things to note
- You can take advantage of this tax relief by paying up to 100% of your earnings (not including rental or investment income) into a pension – or £40,000 a year, whichever is higher
- You can put in more than £40,000 in any one year by using up allowances going back three years – as long as you have enough earnings in the year you are paying into your pension
- You can take advantage of this tax relief even if you don’t pay tax – up to a maximum contribution of £3,600 a year (of which you will pay 80% yourself, which is £2,880)
- You can take advantage of this tax relief up to the age of 75