Tax benefits of pensions

Tax benefits of pensions

The government is keen to get us all saving towards our retirement. So it has introduced various tax incentives to encourage us.

Tax benefits of pensions

When you add these incentives up, they make pensions a really attractive way of saving for retirement for most people.

Here’s a summary of the main tax benefits:

Tax relief on contributions
​20% for basic rate taxpayers, and up to 40% for higher rate taxpayers and 45% for additional rate taxpayers in 2016/17. If your income is between £100,000 and £122,000, it is possible to get the equivalent tax relief of as much as 60%, due to the rules around the withdrawal of the personal income tax allowance for income over £100,000.

Learn more about tax relief on contributions
Tax relief on growth ​No tax on income or capital growth on investments held within the pension fund.

Learn more about tax relief on growth
Pension commencement lump sum ​25% of your pension fund is available as a lump sum, free of tax, at retirement. This is subject to a cap of 25% of the Lifetime Allowance. The remaining 75% of your pension fund is subject to tax.

But there are a few conditions:

Annual Allowance ​There’s a limit on the amount of contributions you can make each year which attract tax relief. For most people, this is currently £40,000, or 100% of your earnings whichever is the lower. If you have enough income in the current year and had a pension in the relevant previous tax year(s), you can increase your allowance by any unused allowance for the previous three years.

Tapered annual allowance

From April 2016 your Annual Allowance will reduce from £40,000 if your income is at least £110,000 and your income plus your pension contributions total £150,000 or more. Your Annual Allowance will reduce by £1 for every £2 this amount exceeds £150,000 down to a minimum allowance of £10,000.
​Money Purchase Annual Allowance If you choose to take a taxable income from any of your defined benefit pensions your Annual Allowance will be replaced by the Money Purchase Money Allowance. This reduces to £10,000 or 100% of earnings, whichever is the lower amount that can be paid into pension, with no ability to bring forward previous unused allowances.
​Lifetime Allowance ​There’s also a maximum total amount that an individual can hold within all their pension funds without having to pay extra tax when withdrawing money from them, for having saved too much. This reduced to £1m on 6 April 2016. Anyone with a large pension built up while the Lifetime Allowance has gradually reduced can ‘Protect’ their savings if they apply to HMRC. The basic principle of this protection is that, provided no further contributions are made to any pension, the extra tax will not be applied to any amount between the new and the previous Lifetime Allowances. The arrangements for the most recent reduction in the Lifetime Allowance have not been published yet, but details of the rules governing the previous changes to the allowance can be accessed here.

Remember:

  • Tax rules can change and the benefits and drawbacks of particular tax treatment will vary with individual circumstances.
  • SIPPs are not for everyone. You need to have the necessary skills to invest your own pension fund as the value of investments can fluctuate and you could get back less than you invested.
  • Barclays is not a legal or tax adviser and is not providing you with legal or tax advice. Nothing in this document should be construed as tax advice. If you have any queries as to the legal or tax implications of any investment or course of action you should seek independent professional advice.

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Remember:

  • Tax rules can change and the benefits and drawbacks of particular tax treatment will vary with individual circumstances.
  • SIPPs are not for everyone. You need to have the necessary skills to invest your own pension fund as the value of investments can fluctuate and you could get back less than you invested.
  • Barclays is not a legal or tax adviser and is not providing you with legal or tax advice. Nothing in this document should be construed as tax advice. If you have any queries as to the legal or tax implications of any investment or course of action you should seek independent professional advice.
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