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Pensions - What are the tax advantages and implications?

The Government offers generous tax relief on pension contributions to encourage people to save for their retirement.  As well as tax relief when you put money in, there are also tax benefits when your pension fund is invested and also when you come to take money out.   This makes a pension a tax-efficient way of saving for your retirement. Although, tax treatment depends on your individual circumstances.

Tax Relief on Contributions

When you make a payment into a pension you receive tax relief from the Government   Over time, this may enhance the value of your pension considerably.

Personal Contributions
When you make a contribution to a personal pension, you can get basic rate tax relief of 20%.  For example, for every £80 you pay into an individual pension the provider will reclaim basic rate tax relief of £20 you to make the total contribution £100.  You can also contribute to another person’s pension and get tax relief.

If you are a higher or additional rate tax payer, you can claim back the additional tax relief via your tax return.  A £100 contribution could effectively cost you £60 if you are a higher rate tax payer, or £55 if you are an additional rate tax payer.

Annual Contribution Limit
Each year you can get tax relief on 100% of your net relevant earnings paid to your pension, with an upper limit of £40,000. If you have not fully utilised the annual allowance in previous years then there is the ability to carry forward unused allowances from the last 3 tax years. If you exceed the £40,000 annual allowance (and do not have any unused allowances from the previous 3 tax years) you will be liable to a tax charge based on the excess.

If you do not have any net relevant earnings from employment then you are still able to contribute £3600 into a pension each year, however the annual allowance is restricted to £2,880 net, with basic rate income tax relief applied by the pension provider with any additional income tax relief received via completion of your self assessment tax return.

Tax-privileged growth
Unlike many other types of investment, your pension fund grows largely tax-free.  This can help to increase the amount of money you have at retirement.  At the same time, you should remember though that the value of your investment can still go down as well as up.

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