Personal Pensions can be extremely tax efficient especially if you are paying higher rate tax and approaching 55.Tax relief is usually available on contributions.Funds in your pension pot grow tax free and can be outside your estate for inheritance tax (IHT) purposes.You can contribute up to your “relevant earnings”. If you have no “relevant earnings” then up to £3,600. There are also annual and lifetime contribution limits. If these limits are exceeded there will be a tax charge. The annual limit (called the Annual Allowance) for 2022/23 is £40,000. This can be tapered down to £4,000 where your “adjusted income” is over £240,000.Employers can also contribute and again there are annual and lifetime limits. The contributions do not count as a benefit in kind for the employee and there is no NIC charge. There is now a Pension Advice Allowance. An employer can pay for up to £500 of retirement financial advice for an employee tax free.You can have a personal pension over which you have personal control. This will allow you to alter your contributions, suspend them, or stop them completely.On reaching 55 you can choose how much to withdraw (without limit) from your defined contribution (DC), or ‘money purchase’ pension savings. You have a range of options when you decide to take benefits such as purchasing an annuity or electing for capped or flexible drawdown. You do not have to buy an annuity.Up to 25% of the pension can be taken tax free. The remainder is taxed at your highest rate.The lifetime pension saving allowance for 2022/23 is £1,073,100.A good strategy is to make contributions while you are paying higher rate tax and then draw down when you retire and are perhaps only liable to basic rate tax. Pensions are long-term investments. You may get back less than you put in. They are also subject to tax and regulatory change.
We only deal with the tax aspects. If you wish to look at this in greater detail, you should contact your pension adviser.