Advice on Personal Pensions is essential.
Personal pension plans (PPP) have now been around since the late 1980s. They were introduced by the UK government to enable the self-employed, and employees working for companies not operating a group pension scheme, to build up a pension fund for retirement.
PPPs are money purchase schemes with contributions receiving tax relief. An employer may contribute to an individual’s PPP. PPPs can move with individuals when they change jobs. Contributions can also be made by an employer or a third party e.g. parent or spouse.
To contribute into a personal pension and receive tax relief on contributions, an individual investor must be under 75 years of age, and resident in the UK.
Given the many tax advantages that are available through funding a personal pension there are limits to the tax-relievable contributions that can be paid. Individuals are able to make contributions of up to the greater of £3,600 or 100% of their annual earnings to all of their pensions each tax year and receive tax relief on them. But there is an annual limit on the total amount of pension contributions that each person can make without incurring a tax charge. This is called the Annual Allowance. For the 2017/18 tax year the Annual Allowance has been set at £40,000. However it may be possible for contributions in excess of the Annual Allowance to be paid in some circumstances under Carry Forward rules.
For high-earners, the Annual Allowance may be tapered dependent on income levels. Advice is essential to make sure you don’t make an unauthorised payment by mistake and become subject to tax.
Contributions to Personal Pensions generate direct tax savings. Contributions are made net of basic rate tax relief, which means that you will only actually contribute £80 net for every £100 of contributions paid.
Higher and additional rate taxpayers likewise make contributions net of basic rate tax and can then claim additional relief. A 40% taxpayer therefore only contributes £60 for every £100 of contributions falling within the higher rate band.
Monies in pension have no liability to tax on capital gains and all forms of investment income are also tax free. Money is therefore likely to grow faster in a Personal Pension than in most other forms of investment.
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