Pensions are one of the most tax efficient ways to save and build wealth for retirement. Whatever your retirement goals may be, investing in a pension is likely to be part of a good solid financial plan.
Here are some benefits to investing in a pension:
Up to 45% tax relief – depending on your personal circumstances increasing your pension pot by £10,000 could be achieved at a cost to you of only £5,500. If you are an additional rate tax payer (45%) and you were to put £8,000 into your pension, the pension provider would "top this up" by claiming £2,000 tax relief to make the pot £10,000. Assuming that all of the contribution falls into the additional rate tax, you could then be entitled to claim an additional 25% tax back on your Self Assessment Tax Return of £2,500.
Employer Contributions – Whilst you receive tax relief within limits on any contributions you make, providing you "opt in" your employer must make contributions to your pension too. If your employer agreed a 5% matched contribution scheme and you earned £60,000. This would be £3,000 per year or £250 per month, however with tax relief applied, it would cost you £200 per month or £2,400 per year. Your employer would then also contribute £250 and you would be able to reclaim £50 higher rate tax relief on your tax return. Over the course of a year, that provides a benefit to you and your pension plan of £6,600 at a cost to you of only £2,400.
Tax Free Growth – any investments within your pension will grow free of capital gains tax and income tax.
25% tax free – Generally, up to 25% of your pension pot can be withdrawn tax free; with the remainder taxed as income. There is no longer any withdrawal limits so pension assets can be withdrawn flexibly from the age of 55 (57 from 2028).
The exact tax benefits available to you will depend on your individual circumstances and may change in the future – speak to an XV Wealth adviser to see how you can maximise your pension today.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.
The above is for information only and does not constitute advice.
The Financial Conduct Authority does not regulate tax planning.
The content in this article was correct on 02/06/2024.
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