Pension Contributions Q & A
The rules regarding pension contributions can be confusing, and can vary depending on whether you are paying into a person or company pension. This article answers some of the most frequently asked questions relating to pension contributions.
Q. My company recommends I make additional pension contributions and told me that there is a tax benefit for doing so. Can you explain what this means?
You pay income tax on your earnings, and you are taxed at source, meaning that your wage slip usually states the amount of tax you have paid from your salary. If you have a company pension, then before any pension contribution is made, your pension provider is entitled to claim tax back from the government at the basic rate of 20 per cent. This is known as basic rate tax relief.
What this means is that for every £80 your company pays into your pension, you end up with a pension pot of £100. This is the Government’s incentive to get people to save as much in their pensions as possible.
Q. I don’t pay tax, can I still get tax relief on a personal pension?Yes. Even if you do not pay any tax, perhaps because your salary falls below the tax threshold, then you can still pay into a personal pension scheme and benefit from the basic rate tax relief of 20 percent, up to the limit of £2,880. So, if you pay the maximum £2,880 into your personal pension each year, the Government will help boost your fund size to £3,600.
Be advised however, that there is no tax relief for pension contributions over the £2,880 limit.
Q. Can I make contributions into my wife’s pension?You can put money into someone else's personal pension, for example your wife’s or a child or even grandchild. They will benefit from the basic rate tax relief on the contributions, but the payments won’t have an effect on your own tax rate or bill.
If your wife does have an income, you will be entitled to pay in up to £2,880 a year which will qualify for the tax relief and be increased to £3,600.
Q. Aside from basic rate tax relief, do pensions offer any other tax advantages?Your pension is a very tax efficient savings vehicle, and unlike other investments it doesn’t pay any tax on capital gains made or any income from the investments held within it.
Furthermore, when the pension reaches maturity, you are entitled to withdraw up to 25 percent of the total value, as a tax-free lump sum.
Q. I began paying contributions into an occupational pension two years ago, but was made redundantly recently. Will I get my contributions refunded?Generally speaking, people can only get their pension contributions refunded if they withdraw or are withdrawn from the pension scheme within two years of having started making payments.
You should check with your former employer whether you are still within that timeframe, although given that you were made redundant they may be prepared to be more flexible.
Bear in mind, however, that the pension scheme administrator will deduct tax from any refund due to you, as it would have been added as part of the basic rate tax relief that no longer applies once you are out of the pension.