Pensions tax

Contributions are made net of tax relief. This means you'll only actually contribute £80 net for every £100 of contributions paid to the pension. Higher rate taxpayers likewise make contributions net of basic rate tax but can also then claim additional relief via their Inspector of Taxes/Self Assessment return. A 40% taxpayer therefore only contributes a net £60 for every £100 of contributions falling within the higher rate band. These figures assume basic rate tax of 20% and higher rate tax at 40% (2008/09). Your pension contributions will be based in funds where there is no liability to tax on capital gains and where all forms of investment income (except dividends) are also tax free. So your money may grow faster in a stakeholder or personal pension than in most other forms of investment. When you retire you can take up to 25% of the fund as a tax free cash lump sum. You no longer need to take all your benefits by the time you are 75 but after this age, you can only take benefits as income (you'll get money paid out each month). If the total value of all your pension benefits exceeds your "Lifetime Allowance" you will be subject to a tax charge of up to 55%. The Lifetime Allowance for the 2008/09 tax year has been set at £1.65 million, rising to £1.8 million for the tax year 2010/11. Those with substantial pension funds should ensure they avoid going over this limit. By April 2010 the earliest age upon which you could take benefit is being increased from the current age of 50 to age 55.