What is a pension?
Pensions seem complicated but essentially they are very simple.
A pension is a tax efficient ‘wrapper’ with the specific purpose of
securing an income for you when you stop working and reach retirement age. The
government wants to encourage us to support ourselves financially in retirement and provides
incentives to save in the form of tax advantages.
Key benefits
Tax relief on contributions
Regardless of earnings, all UK residents under the age of 75 can enjoy basic rate tax relief of 20%. Higher rate taxpayers will are entitled to an additional 20% tax relief via their self-assessment.1 The tax relief applies to the lower of your total annual earnings up to a maximum of £245,000 (for tax year 2009/10).
No capital gains or income tax
Investments within the pension grow free of capital gains tax and income tax (please
note that the 10% tax credit on UK equity dividends is no longer reclaimable).
Provision for others
For example, a grandparent might contribute £2,880 on behalf of a grandchild, worth £3,600 after basic rate tax relief.
No inheritance tax
If you die before taking your retirement benefits, you can normally pass the fund to your chosen beneficiaries free of Inheritance Tax.
Taking benefits
You can access the money in your pension from the age of 50, (age 55 in April 2010).
1 From April 2011, tax relief on pensions contributions will be restricted for those
with incomes of £150,000 and over, and tapered down until it is 20 per cent.
Common questions
How much can I pay into my pension?
There is no upper limit on how much you can pay into your pension schemes. However,
tax relief applies to the lower of your earning and the annual allowance, currently
£245,000 (for tax year 2009/10). Contributions above this incur an annual allowance
tax charge of 40%.
How much should I pay into my pension?
What you pay into a pension plan depends on what you can afford. It can be anything from as little as £20 a month to your monthly salary, if you wish. The earlier you start the better. This is because the more time your savings have to grow, the bigger your pension is likely to be.
How much can I build up in my pension?
Your tax free pension funds are limited by a the lifetime allowance. Put simply, this is the total value of all of your pensions when you retire. The lifetime allowance for 2009/10 is £1,750,000 and you have to pay tax on any excess over this amount. Most people’s pension funds are way below this level so this should not concern them. However, if your pension fund is close to or above this level you should speak to our pension specialists.
Need help? Call 020 7189 9999