Pensions and tax relief explained — how how to get the most out of your plan

Pensions have tax relief benefits (Image: GETTY) Pension savers have been encouraged to understand the ‘significant’ tax benefits of pensions. Nicholas Hamilton, director of Financial Planning at Mazars, told Express.co.uk : ‘Whilst not an investment return, savers should also recognise the value and return that is provided in making personal pension contributions. ‘The impact of the tax-relief obtained in making a contribution, together with the ability to withdraw up to 25 percent of the pension tax-free in retirement, can provide a significant boost to individuals’ pension benefits.’ A person can access their pensions when they turn 55 and can take up to 25 percent of their available lifetime allowance as a lump-sum with no tax to pay. The current lifetime allowance for how much a person can save into their pension is £1,073,100. Pensions have tax relief benefits (Image: GETTY) This is being scrapped from April 2024 but the maximum lump-sum will remain at £268,275. Mr Hamilton explained how the tax relief can benefit a pensions saver. He said: ‘A personal contribution of £100 gross paid into a pension by a higher-rate (40 percent) taxpayer, would effectively cost £60 after the associated tax relief has been claimed. ‘Ignoring any investment return within the pension, in retirement, assuming at this stage the individual is a basic rate (20 percent) taxpayer, the same £100 would be worth £85 in their pocket (£25 being tax-free, £75 subject to 20 percent income tax). ‘This represents an effective return of 41.66 percent on the £60 net contribution. For basic rate tax payers (whilst working and in retirement), the same contribution would see an effective return of 6.25 percent.’ Pensions have tax relief benefits (Image: Getty) From April this year, Britons can now save up to £60,000 a year into their pensions, up from the previous annual allowance of £40,000. Chancellor Jeremy Hunt recently announced a raft of policies promising to boost pension payments by around £1,000 a year. A group of nine of the UK’s largest defined contribution scheme providers have agreed to allocate five percent of their assets in default funds to unlisted equities by 2030. By switching to investments with a better return, the policy promises to increase pension pots by up to 13 percent, or by £16,000 for the average earner. A new Value for Money Framework will also be created to outline that investment decisions should be based on long-term returns and not just the costs involved. Mr Hunt said: ‘British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earner over the course of their career. ‘This also means more investment in our most promising companies, driving growth in the UK.’ For the latest personal finance news, follow us on Twitter at @ExpressMoney_.