A personal pension is like a savings pot for your retirement. You put money into it, and it has the potential to grow over time thanks to investments. When you retire, you can start taking money out of this pot. It’s flexible, so you can choose how much you want to save and when you want to start using it, as long as you’re at least 55 years old.
Furthermore, income tax relief is available on personal pensions through a government top-up at the 20 percent basic rate of income tax.
So, for every £8 you contribute, the government will top it up to £10. This means that if you invest £1,000 in your pension pot, the government will add an extra £250. As a result, you get an effective 25 percent uplift to whatever pension contributions you make.
You can still benefit from this top up even if you don’t pay taxes. So non-working people, children and retirees can all benefit. But there’s an annual limit of £2,880 (or £3,600 with the government top-up) for non-working people.
If you’re paying a higher tax rate, such as 40 percent or 45 percent, the government gives you a top-up on your pension contributions. It’s a way to balance things out. You get tax relief that makes up the difference between the basic tax rate of 20 percent and your higher tax rate. So, you end up getting more back in tax relief the more tax you pay. It’s a helpful boost from the government to encourage saving for retirement.
