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Tax relief on your pension contributions

You can save as much as you like into any number and type of pensions.

Up to age 75, you get tax relief on contributions of up to 100 per cent of your earnings each year. This broadly means that (using the basic tax rates for 2008/09) for every £80 you pay into a personal pension, the Government adds an extra £20. This is subject to an upper 'annual allowance' £245,000 for the 2009-10 tax year. Savings above the annual allowance will be subject to a tax charge.

Do not forget that although saving in more than one pension scheme can give you flexibility and choice, it can also lead to you paying more in administrative costs.

• Pension rules from April 2006

• Tax advantages of personal pensions

Tax allowances when you claim your pension

Most people choose to wait until they are 60 or 65 before drawing their pension. However, you do not have to retire from work to get your pension benefits.

When you retire, you can take up to 25 per cent of the value of your total personal pension savings as a tax-free lump sum, up to a maximum of 25 per cent of the lifetime allowance. The lifetime allowance for the tax year 2009-10 is £1.75 million, rising to £1.8 million in 2010-11.

You then have two options:

• use the rest of the fund you have built up to buy an annuity (a regular income payable for life) from a life insurance company; this does not have to be the same company that you have your pension plan with 
• take an income (taxed at your normal Income Tax rate) from the remainder of your fund while it continues to be invested – as an 'unsecured pension' up to age 75 or an 'alternatively secured pension' once you reach age 75

If your total pensions savings exceed the lifetime allowance you have two choices:

• if you take the excess as a taxed lump sum, the excess amount is taxed at 55 per cent
• if you take the excess as income, the excess amount is taxed at 25 per cent; income taken from your pension pot will then be taxed at your usual Income Tax rate

If your total pension savings from all sources is below a certain amount, £17,500 or less in 2009-10, you may be able to take the whole amount as a cash lump sum, with 25 per cent tax-free. This amount, known as the ‘trivial amount’, will rise to £18,000 in the 2010-11 tax year.

For more detailed information on ways to take your pension visit the Financial Services Authority (FSA) website.

• FSA on ways of taking your pension from April 2006 Opens new window

• FSA factsheet: income withdrawal - pension changes (PDF document, 95K) Opens new window

More useful links

• Understanding personal pensions