For personal pensions, you will pay income tax on your earnings before any pension contribution. However, when you pay into your pension, the pension provider will claim back tax from the government at the basic rate of 20%. So, this effectively means that for every £80 net you pay into your pension, your total contribution will be £100 gross. If you are a higher rate (40%) taxpayer, you can claim the difference through your tax return or by contacting HM Revenue& Customs (HMRC), and if you’re an additional rate taxpayer (45%), you can claim the difference through your tax return.
For occupational or public service pension schemes, your employer usually takes the pension contributions from your pay before deducting tax (but not National Insurance contributions), and you only pay tax on the remainder of your pay. This means that no matter what category of taxpayer you fall into, you will benefit from the full tax relief immediately.
That said, you should be aware that some employers will use the same method as that for personal pension schemes. A change in rules on 6 April 2006 (A-Day), a new set of pension rules came into effect. The previous eight separate sets of rules were replaced by one simple set of regulations which apply to all types of pension.
The new rules have meant that you can now contribute and receive pension tax relief on £3,600 or up to 100% of your earnings each tax year, subject to your annual limit (currently £5040,000).However, the rules have also seen the introduction of a cap on the total amount you can put into your pension over your lifetime. The limit is currently£1,073,100 for 2020/2021 tax year. Pension savings above this limit will be subject to tax at 55% for a lump sum or 25% if taken as a pension.
The earliest you can get your hands on your pension fund is when you reach the age of 55 (increasing to 57 in 2028).You can now take up to 25% of your total pension savings as a tax-free lump sum when you retire. However, the lump sum is only tax-free if it is less than 25% of the lifetime allowance for that tax year. If your total pension savings are greater than the lifetime allowance, you can take the excess as a cash lump sum, but you will have to pay a 55% tax charge.
Once you have taken your tax-free lump sum, you can then use the remaining money to buy an annuity, or you can draw a taxable income directly from your pension fund – known as a drawdown pension. In certain circumstances, you can also take your total pension savings as a cash lump sum and still benefit from the 25% tax-free status. Bear in mind that pension schemes vary so check with your provider to find out what your particular scheme allows.
You can also request contact details from the Pension Tracing Service by phone or by post.
The Pension Tracing Service
Telephone: 0800 1223 170
From outside the UK: +44 (0) 1782 389134
Monday to Friday, 9:00 am to 5:30 pm
The Pension Tracing Service
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The Pension Tracing Service ® is a trading style of the Millennial Wealth Ltd. We are authorised and regulated by the Financial Conduct Authority. FCA number 914746. Unit 11Flag Business Exchange Peterborough Cambridgeshire PE1 5TX. The registered company number is 11557299
This service is not affiliated with the Department of Work and Pensions or any government body. The Pension Tracing Service does not offer financial advice to our clients. However we can allocate you an Authorised and Regulated Pension Specialist.
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