Tax benefits are subject to HM Revenue & Customs (HMRC) limits. Tax relief depends on individual circumstances and may change in the future.
The more you pay into your pension, the more potential there is for you to achieve the retirement you want. The real boost is the tax relief you can enjoy, depending on the rate of income tax you pay. Here are some examples of how you might benefit.
We are able to increase your personal contributions equivalent to basic rate tax. So:
Please note these examples are illustrative and don't cover all income tax bands. The amount of tax relief you would receive will depend on your own personal circumstances, for example, if you live in Scotland or Wales.
*If you pay income tax at 40%, you can claim tax relief on the extra 20% through your self-assessment tax return. You can also do this online.If you don't fill in a tax return, you'll have to contact HMRC. If you pay 45% income tax, you can only claim tax relief on the extra 25% through self-assessment.
For those earning over £200,000 a year, this additional tax relief will depend on your income which may mean that your annual allowance for tax relievable contributions is reduced from £40,000 to £4,000.
The effect of tax relief on pension payments over time can be considerable. The more you contribute, the more tax relief you can get, subject to HMRC limits. See our topping up page to see an example of how this could work over time.
You can learn more about tax and HMRC limits from our 'Tax and your pension' leaflet.
The compounding effect is where the value of the growth in your pension goes on to grow in value too.
Let's take a closer look at how it works…..
Here's an example
If you save £1,000 every year for 5 years, with no investment growth - after five years you'd have £5,000. This is still a good amount, but it's not benefiting from any growth.
However, if you invested the same £1,000 every year for 5 years into a pension fund, with growth of 4% (after charges) would turn it into £5,633.
Compound investment growth example
These figures are just examples and values at the end of each year are rounded to the nearest £1.
Please remember that the value of an investment can fall as well as rise, and past performance is not a guide to future performance.
The compounding effect can make a massive difference
There's no limit to the
amount you can pay into your pension, but there are limits on how much tax relief
you can receive. The actual amount HMRC allows you to pay into your pension in
a tax year for tax relief purposes is the greater of:
The annual allowance is a limit on the total amount you can pay
into your pension(s) each year whilst still receiving tax relief. If total
payments to all your pensions, including your Phoenix Wealth pension, in any
year, exceed the annual allowance, you’ll normally have to pay a tax charge on
the excess. For the current tax year, the annual allowance is £40,000.
If you have
an income (including the value of any pension contributions) of over £240,000
and an income (excluding pension contributions) in excess of £200,000, your
annual allowance may be reduced for that tax year. These can be complex rules,
so you may wish to speak to a financial adviser for further information.
Money purchase annual allowance
If you, or
someone on your behalf want to make contributions to your pension but you’ve
already taken certain benefits, this may trigger the money purchase annual
allowance (MPAA). You’ll still have an annual allowance of £40,000 in total,
however for your money purchase pension arrangement:
paying your pension benefits will tell you if the MPAA applies to you.
Find out more about the annual allowance in our tax and your pension leaflet.
limit to the amount of benefits you can build up under a registered
pension scheme. However, everyone has a maximum level of benefits they can take
from all their pensions in their lifetime, without triggering an extra tax
charge. This is referred to as the lifetime allowance.
For the 2022/23 tax year, the default lifetime allowance is
£1,073,100, but may be higher for you, depending on your personal
circumstances. As well as the amount you're currently building up in your
pension(s), the lifetime allowance will also take into account the value of
pension benefits already being paid to you – whether as lump sums or as pension
Find out more about the lifetime allowance in our tax and your pension leaflet.
Any statement about tax liability is based on our interpretation
of current UK tax legislation and Her Majesty’s Revenue & Customs (HMRC)
practice and does not constitute advice. It should not be treated as legal advice or relied upon as a
statement of law. Registered
pension schemes follow HMRC rules on payments and benefits. If these are not
followed, you could pay more tax than you need to.
Future changes in law and tax practice could affect how
much your pension is worth and your tax liability. Your pension could also be
affected by changes in your personal financial circumstances
You have the flexibility to take your retirement benefits in a way that suits you.
Subject to the annual allowance, one option is to take up to 25% of your pension savings as a tax-free lump sum. You then have the freedom to use the remainder of your pension as you choose from age 55 onwards. Find out more.
That little bit extra could make a big difference. See how topping up your pension could help maximise what you've got. It's easy to do.
The funds you invest in will heavily impact what you get when you retire. Find out how you could adjust your investments as you approach retirement.
It's important to discuss your options with an adviser. If you don't have one - don't worry, we can help you find one local to you.