The tax benefits of a SIPP

How you could turn £6,000 into £10,000

When you contribute, basic rate tax relief is automatically added to your contribution by the government. For instance, invest £8,000 and the government tops this up by £2,000 to make a total of £10,000.

If you're a higher rate taxpayer you can claim any higher rate tax relief you are due via your tax return – up to a further £2,000 in this example. £10,000 in your SIPP could therefore cost you as little as £6,000. You can do what you like with the higher rate tax you get back. Many clients actually reinvest it in their SIPP and receive another round of tax relief.

Each tax year you can pay as much as you earn into pensions like a SIPP and get tax relief (effectively capped at £235,000 in 2008/09 tax year). Even non-taxpayers such as children or pensioners (who are under 75) can still contribute £2,880 to which the government adds £720 making a total investment of £3,600 gross.

Basic rate tax relief is automatically added when you contribute to your pension (although there is normally a time delay of 6 to 11 weeks), meaning there's no extra hassle for you in order to receive the benefit.

Further tax benefits

Don't forget that once invested in your pension the funds will grow free of UK Capital Gains Tax and Income Tax (tax deducted from dividends cannot be reclaimed).

When you retire 25% of the value of the fund can normally be taken as a tax free lump sum, with the remainder then being used to provide you with a taxable income.

No Inheritance Tax if you die before retiring

If you die before you begin taking the benefits from your pension the funds will normally be passed to your spouse or other elected beneficiary free of Inheritance Tax. Other tax charges may apply depending on the circumstances.