Pension Tax Reliefs
Types of pension schemes
There are two types of pension schemes from which an individual may eventually receive a pension:
- Workplace pension schemes
- Personal Pension schemes.
Contributions are invested for long-term growth up to a selected retirement age.
At retirement - which may be any time from the age of 55 - the accumulated fund is generally turned into retirement benefits - an income and a tax-free lump sum.
25% is available as a tax free lump sum with the remainder taxable as income.
All UK residents may have a money purchase pension.
This includes non-taxpayers such as children and non-earning adults.
However, they will only be entitled to tax relief on gross contributions of up to £3,600 per annum.
Relief for individuals’ contributions
An individual is entitled to make contributions and receive tax relief on the higher of £3,600 or 100% of earnings in any given tax year.
However tax relief will generally be restricted for contributions in excess of the annual allowance.
The annual allowance
For 2017/18 onwards the annual allowance is £40,000.
Any contributions in excess of the £40,000 annual allowance are potentially charged to tax on the individual as their top slice of income. Contributions include contributions made by an employer.
To allow for individuals who may have a significant amount of pension savings in a tax year but smaller amounts in other tax years, a carry forward of unused annual allowance is available.
The lifetime limit
The lifetime limit sets the maximum figure for tax-relieved savings in the fund at £1,030,000.
If the value of the scheme(s) exceeds the limit when benefits are drawn there is a tax charge of 55% of the excess if taken as a lump sum and 25% if taken as a pension.
Accessing your pension
Individuals have flexibility to choose how to access their pension funds from the age of 55.