Pension contributions can receive tax relief on worth up to 100 percent of annual earnings. This tax relief is given automatically if the employer takes workplace pension contributions out of the employees pay before deducting Income Tax and their rate of income tax is 20 percent.
Of total DC pension contributors, 42 percent of them are under 40 but they only receive 27 percent of the available tax relief.
PPI detailed that people in their 40s and 50s receive two and half times as much tax relief from the government.
Also in news that will sadly not surprise many, men are receiving a disproportionately higher amount of support.
Men contribute the most to DC pensions (69 percent) and as such, they receive 71 percent of the tax relief.
While these findings are worrying, PPI detailed that there could be a relatively simple solution.
They went on to detail that changing the current system to a single rate would increase the amount of pension tax relief for the basic rate taxpayer from 26 percent to a more equal 42 percent.
The findings from PPI will go on to inform the Association of British Insurers wider policy work on simplifying pension’s tax relief.
The research conducted found that generally, the current pension’s tax relief system is too complex and it has made it difficult for savers to plan for the long term.
Both institutions involved in the research have called for changes to be made to the system to make it simpler, fairer to all earners and encourages saving for retirement.
Yvonne Braun, a Director of Long-Term Savings and Protection at the Association of British Insurers, commented on the findings: “Pensions tax relief plays a vital role in encouraging people to save, but also in supporting the adequacy of that saving.
“However, the distribution of pension’s tax relief under the current system exacerbates existing inequalities, particularly between men and women.
“We hope the research will provide food for thought on how to make the system simpler and fairer.”
Tim Pike, the Head of Modelling at PPI, concurred with this: “While automatic enrolment has significantly increased the number of low earners benefiting from tax relief on DC pension contributions, half of the value of this relief goes to people earning £60,000 or more.
“A change to the system of tax relief on DC pensions could offer an opportunity to address the philosophy of the current system although implementation would present challenges.”