Tax benefits of a pension

How you can significantly boost your investment

Each time you contribute to your stakeholder pension the government will automatically add 20% (basic rate tax relief), significantly boosting the amount that gets invested.

Or for example if you wish to contribute £10,000 to your personal pension, the Government will pay £2,000 of this (20% of £10,000), meaning an investment of £10,000 costs you just £8,000.

Even non-taxpayers such as children or pensioners are entitled to the same rate of tax relief on contributions of up to £3,600 gross. If you’re working you can contribute up to 100% of your earnings for this tax year (effectively capped at £235,000). Therefore if you have not made a pension contribution since 6th April, you should be able to make use of your full allowance now.

How much can
I contribute?

The amount you can contribute to a Stakeholder pension varies according to your circumstances and earnings.

This 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 or complicated forms to complete in order to receive the benefit.

Pension and tax rules are subject to change by the government. The tax reliefs referred to are those currently applying, and their value will depend on your individual circumstances.

As a higher rate tax payer
you could turn £6,000 into £10,000

As well as the basic rate tax relief shown above, if you are a higher rate tax payer (and you have sufficient earnings in the higher rate tax bracket) you can claim up to a further 20% tax relief via your tax return. This means a gross pension contribution of £10,000 could effectively cost you just £6,000. Remember your pension allowance resets every 6th April so you can start making fresh contributions and reducing your tax liability for this tax year now.

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 an income (the income will be subject to tax).

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.