Personal Pension Schemes

2. Tax Breaks

Tax relief on your contributions to personal pension arrangements will boost your savings.

2.1 Following tax simplification, you can pay as much as you like into one or more pension schemes. But there are conditions for obtaining tax relief:

• The scheme(s) to which you are contributing must be HM Revenue & Customs registered (ie approved).
• You can obtain tax relief on up to 100 per cent of your contributions to these scheme(s) providing they (plus your employer's contribution) fall short of the 'annual allowance' (£235,000 in 2008/09).
• The contributions in question must come from your earned income, from up to £2,808 (net) of unearned income, or from your employer.
• Any contributions in excess of the 'annual allowance' will be taxed at 40 per cent.

2.2 You will receive tax relief up to your top rate.

• Tax relief at basic rate (22 per cent) is now given automatically. So you only have to pay in £78 to get £100 invested in your pension.
• Higher rate taxpayers are entitled to relief at 40 per cent on their contributions. Individuals must claim the additional 18 per cent tax relief back through self-assessment tax returns.

2.3 Unless you are barred from joining at all (see 1.3), you can currently pay up to £2,808 a year (ie £3,600 a year with the tax refund) into personal pension schemes, whatever your income.

• Even people with no income at all can pay up to £2,808 a year.

2.4 Providing that the total value of your pensions does not exceed the 'lifetime allowance' (£1.65 million in 2008/09), you can take it free of any tax charge.

• Insofar as it does exceed the 'lifetime allowance', any benefits taken as a lump sum will be taxed at 55 per cent.
• Any benefits taken as a pension will suffer tax at 25 per cent.

2.5 Subject to the 'lifetime allowance', you can usually take out up to 25 per cent of your accrued personal pension fund tax-free on retirement.

• The rest of the pension fund may be used to buy a lifetime annuity, or a short-term annuity, or take income withdrawal.
• If you reach age 75 without buying an annuity, you can take out an alternative secured pension fund.
• You can convert this into an annuity at any time.
• Income drawn from an annuity or secured capital is taxed as earned income.

2.6 In order to qualify for tax relief, you cannot usually receive your pension before age 50. This is due to rise to 55 by 2010.

• You can choose to take your pension at any time between the ages of 50 and 75.
• If you have more than one pension plan, they can be paid at different ages.