Pensions Guide

From the 6 April 2011 the maximum amount that can be saved into a pension tax-free is £50,000.

The effect of this is that 20 per cent of what a basic rate taxpayer pays into his or her pension is constituted from tax that would normally be paid on that money.

So in a year, if a total of £10,000 is paid into a pension £2,000 is paid by the government so the net payment from your take-home earnings is £8,000.

With the ability to invest up to £50,000 a year before tax pension investments, like SIPPs, are an attractive way to limit the impact of tax on your earnings.

Key facts:

• The tax-free annual pension savings allowance: £50,000
• Higher and additional rate taxpayers can claim tax relief above the 20% basic rate
• The Lifetime Allowance – the total value of pension savings before any tax charges apply: £1.5million

Tax on Pension Income

Up to 25% of your pension can be taken as a lump sum tax free, within the lifetime allowance

Income tax is charged on pension income such as annuities or income drawdown, including state pension

You do not pay any national insurance contributions when you are retired

The personal allowance – earnings allowed before tax is charged – is: £10,500 for 65–74 year olds and £10,660 for people aged 75 and over (2012-13)

If annual income in retirement exceeds £25,400, the personal allowance is reduced by £1 for every £2 extra earned, e.g. by half the amount of extra income. The personal allowance in retirement will not fall below the standard personal allowance, unless your income exceeds £100,000