Tax benefits of pensions
The Government is so keen to persuade people to save towards their retirement that it has established a number of tax breaks and incentives to encourage us to do so.
The combination of these incentives has made pensions the most compelling savings vehicles for retirement, more so than any other products in many cases. However, recent proposals restricting tax reliefs for high earners are likely to make pensions less attractive as retirement savings vehicles for those earning £150,000 or more.
The tax benefits of pensions can be summarised as:
| A minimum of 20% relief, whether you pay tax or not - and up to 40% relief (2009/10) for higher rate taxpayers. | |
| No tax on growth of capital or on income, within the pension fund. | |
| No tax if you die before drawing benefits. | |
| 25% of your pension fund available as a lump sum, free of tax, at retirement. |
In exchange for this raft of tax breaks, the Government lays down three conditions:
| A maximum sum that can be invested each year into pensions. | |
| A maximum cumulative sum that can be accumulated within a person’s pension funds. | |
|
At least 75% of the pension fund must be used to provide an (starting at a date of your choice between ages 55-75, or 50-75 until 5 April 2010). The fund cannot be accessed early, or used as security for a loan – it must be used for solely for retirement purposes. |
 Saving for retirement |
