Pensions - what you need to know

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  • If you are UK resident and under the age of 75, you may contribute to a pension and be eligible for tax relief
  • The government will top up your contribution by 20% - this is known as basic rate tax relief at source
  • If you are a higher rate or additional rate tax payer, a further 20% and 25% respectively can be claimed back through your tax return
  • You cannot claim back more tax relief than your earned income
  • An annual allowance of up to £40,000 can be paid into a pension but this will depend on your earnings for the year and whether you have drawn any taxed income 
  • You can access your pension from the age of 55

Tax Relief and how it works

Current regulations allow up to 45% tax relief when a personal contribution is made to a pension. 20% is paid by HMRC to the pension with any higher and additional rate tax relief reclaimable through your tax return.

For example, an investor contributes £8,000 into their pension with £2,000 claimed back from the HMRC giving a £10,000 total contribution. A higher rate tax payer could claim a further 20%, reducing the cost of the personal contribution to £6,000. For additional rate tax payers the cost of the £10,000 contribution would be £5,500. 

To receive higher or additional rate tax relief you must have paid enough tax at that rate. 

What happens if you don't have any earnings?

As long as you are UK resident and under the age of 75, you may still contribute up to £2,880 each year which is topped up to £3,600 with a £720 payment from the government. 

 Further Tax Benefits

  • Money invested in a pension is free from income tax and capital gains tax
  • Unlimited withdrawals from age 55 (scheduled to increase to 57 in April 2028). This can usually include a tax-free lump sum of  up to 25% of the fund with any additional withdrawals treated in the same way as earned income for tax purposes
  • When you die, any money left in your pension pot can typically be passed onto your beneficiaries free from inheritance tax. If you die before reaching age 75, any withdrawals they make will usually be tax free. If you die aged 75 or older, the withdrawals will be taxed as income in the same way as their own earned income.

Important information

The tax treatment of pensions depends on individual circumstances and is subject to change in the future. The details surrounding pension rules are very complex. If you are in any doubt whether the Cofunds Pension Account is suitable for you, we recommend taking regulated financial advice. If you need help in this area, contact us and we will be happy to put you in contact  with one of Charles Stanley's experienced Financial Planners.