Saving into a pension
Pensions and tax
Saving in a pension scheme can provide you with tax advantages.
Pensions have long been seen as a tax-efficient form of investment. The contributions that you pay into your pension will benefit from tax relief, and aren’t subject to tax while they’re invested in your pension pot (although the tax credit paid with dividends can’t be reclaimed by your pension scheme).
If you’re saving into a defined contribution pension scheme, when you decide to start drawing retirement benefits, you can generally take up to one quarter (25%) of your pension pot as a tax-free lump sum (called a pension commencement lump sum (PCLS)). You can then use the remainder of your pot to provide an income that may be subject to income tax.
From the 6th of April 2015, there will be no restrictions on how much income you can withdraw from your defined contribution pension pot, but any income that is withdrawn (and it is possible to withdraw your whole remaining pension pot in one go) may be subject to income tax.
It’s good to remember, that you don’t pay National Insurance contributions on any PCLS you take, or on income that you withdraw from your pension pot.
Until 5 April 2015, there are some restrictions on how much you can withdraw from your pension pot, but these cease on 6 April 2015. You can also currently take up to 25% of your pot as a PCLS when you start drawing retirement benefits.
If you’re a member of a defined benefit workplace pension scheme, the amount of PCLS that you can receive at retirement, and the pension that you receive during retirement, are based on a number of factors including the scheme’s accrual rate, the length of your membership of the scheme and how much you earn.
The following pages discuss how tax may apply to different aspects of your pension saving.
- How is my pension taxed?
- How is my State Pension taxed?
- Personal allowances and income tax rates
- Do I pay NI on my pension?
- Tax and the cash lump sum
- Tax on investments
- The lifetime allowance
- Other times when you might get a tax charge
- Tax relief and contributions
- Benefits in Kind
- The annual allowance
- Carry forward
- Tax problems
Where can I find out more?
If you need more information, please contact us. A pension specialist from our team will be happy to help with whatever pensions-related question you have. Our help is always free.