Personal pensions are very tax-efficient if you are saving/investing for the long term:
- The money you put in (your contributions) qualify for full tax relief. This means that if you contribute, say, £2,880 from taxed earnings the government then adds back tax (at 20%) to the fund amounting to £720, meaning that £3,600 is added to your pension pot. Higher rate taxpayers get additional tax relief – they claim back the other 20% of tax paid when they fill in their annual tax returns.
- Once the money is in the fund it can grow without tax being levied on interest income, or on capital gains (however, dividend income is taxed).
- When you reach retirement you can take 25% of the fund in cash, tax-free. The rest has to be put into a ...