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To encourage people to save in a pension, the government gives tax relief on your pension contributions. The amount of tax relief you get depends on how much income tax you pay.For example, for basic rate taxpayers, the taxman will automatically add tax relief to your pension contributions. Therefore, for every £200 you invest in your pension, the taxman will give you an additional £50, so a total of £250 is actually invested in your pension. The amount you pay is called the net contribution and the amount after basic rate tax relief is added is called the gross contribution.
Below are some examples of the tax relief a basic rate taxpayer would receive:
|You pay||The taxman pays||The total invested into your pension|
If you pay basic rate tax, you don’t need to worry about claiming tax relief, we'll take care of this for you. However, if you're a higher or additional-rate taxpayer, you may be able to claim more tax relief through your yearly self-assessment form. The table below illustrates this, based on a net contribution of £100.
Marginal rate of income tax
Gross amount invested in your plan
Maximum additional relief you can claim*
20% basic rate tax
|40% higher rate tax|
|45% additional rate tax|
*Subject to personal circumstances.
Up until the age of 75, you can pay up to 100% of your annual earnings or up to £3,600 gross – whichever is more – into your pension in a single tax year, and still benefit from the tax relief outlined above.
When you take your benefits you can normally take up to 25% of your pension fund as a tax- free cash sum. The remainder will be used to provide a retirement income, which will be taxable.
There is an Annual Allowance which is currently £50,000, and this is the maximum amount that you're allowed to put into your pension each year before you pay a tax charge. However, if you do exceed the Annual Allowance, unused allowances from up to three previous tax years may be available to carry forward to this tax year.
Saving for your retirement in a personal pension, for example our Stakeholder pension, allows you to take advantage of the extra money that the taxman will add – a boost which could really help fund your retirement.
Please note that the law and tax rates may change in the future and the value of tax relief will depend on your individual circumstances.
Our stakeholder pension is a simple, straightforward way to save for your retirement.
Choosing the right pension can be a daunting process, so we've created this jargon buster to explain some of the more complicated words and terms.
Ready to turn your pension fund into an income for life? We can offer extra income for both health risks and medical conditions.