Pensions are long-term investments designed to help ensure that you have enough income in retirement. The government encourages you to save towards your retirement by offering ‘tax relief’ on your contributions.

For each pound you contribute to your scheme, the pension provider currently claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot.

If you’re on the higher tax rate of 40 per cent, you can receive 40 per cent tax relief on your contributions. This relief is only available up to the amount of your income that is taxable at 40 per cent. But the way that the money is given back to you is different:

– the first 20 per cent is claimed back from HM Revenue & Customs by your pension scheme in the same way as for a basic rate taxpayer

– it’s then up to you to claim back the other 20 per cent when you fill in your annual tax return or by claiming by telephone or letter to your Tax Office

You can save as much as you like into any number of pensions and receive tax relief on contributions of up to
100 per cent of your earnings each year, provided you paid the contribution before age 75 and subject to an annual allowance.

For the tax year 2009/10 this is £245,000 and for the tax year 2010/11 it will increase to £255,000. (Savings above the annual allowance and a separate lifetime allowance will be subject to tax charges).

Under changes announced in the 2009 Budget, from 6 April 2011 the amount of tax relief will reduce if your income is £150,000 or more. Restrictions were introduced from 22 April 2009 to stop people making large additional pension contributions and receiving full tax relief ahead of 6 April 2011. The restrictions apply to you if all of the following apply:

– your total pension savings are more than £20,000
– you change the amount of
– your normal regular pension savings
– your income is £150,000 or more

There are more tax advantages to having a pension scheme. Your pension fund will invest the money you save (including the tax relief amount) in your pension and your pension fund growth may be free of tax.

Any rise in the value of the scheme’s assets between what you put in and what they’re worth at the end is called capital gains and is tax-free.
When you come to take benefits you may be able to draw out up to a quarter of the value of your stakeholder or personal pension fund as a tax-free lump sum.

You can put money into someone else’s personal pension, like your husband, wife, civil partner, child or grandchild’s. They’ll receive tax relief added to it at the basic rate, but this won’t affect your own tax bill. If they’ve got no income, you can currently pay in up to £2,880 a year (which becomes £3,600 with tax relief).