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  1. What is Pension Tax Relief?

To understand the magic of pension tax relief, you need to know what it means.  In this article we’re just talking about Private Pensions, as opposed to workplace pensions.  That’s so we can keep things fairly straight-forward.  Tax Relief is a bonus the Government pays into your pension as an incentive to save.  That bonus is paid at the highest rate of income tax you pay.  So, basic rate taxpayers (and even non-taxpayers) get a 20% bonus.   Higher rate taxpayers get even bigger bonuses.  You can get tax relief on up to 100% of your annual earnings, capped at £40,000 a year

  1. How it Works

If you are a basic-rate taxpayer and you save £100 into your pension, the Government adds another £25.  That give you a 20% return on your investment on day one.  Higher-rate (40%) and additional-rate (45%) taxpayers get even bigger bonuses.  You then get growth on your savings plus growth on the tax relief.  It’s a win/win.  What we are talking about here is the magic of compound interest – getting interest on interest.  Einstein said compound interest is the eighth wonder of the world.  And you must admit Einstein was quite smart!


  1. Personal Pensions compared to other products

You should think of the tax relief you get on your pension savings as part of the growth potential.  In that sense, there are no other UK investments that can match this potential return.  That’s because you get an instant return on investment.  It could take years, even decades to get that kind of return from other investments.  Even better, when you get to retirement age, you can take up to 25% of the fund out completely tax free.


  1. Inheritance Tax planning

It is now possible to pass pension funds you don’t use in your lifetime down to future generations without any Inheritance Tax liabilities.  That means which investments you take your retirement income from is far more important than it used to be from a tax planning perspective. If you have a Personal Pension and a General Investment Account, most retired people would naturally begin taking money from their pension, because that’s what people believe they should do. But it might not be the best option. If you have an Inheritance Tax liability you should consider spending other investments and saving your pension funds for generational tax planning.

General investment accounts, like OEICs or Unit Trusts, and most Individual Savings accounts are subject to inheritance tax –  payable at a whopping 40%. Most pension funds can pass down to future generation tax efficiently.


  1. What should you do with this information?

For these reasons, pension funds should be the number one savings choice for most UK investors.   That said, tax benefits depend on your personal circumstances.  And every individual has difference circumstance and objectives.   Factors such as investment amounts, age, salary, tax bracket, and attitude to tax all come into play.  Which is why winging it and hoping you get it right isn’t good enough for those individuals who strive for the best for themselves and their family.  Especially when we’re talking about saving potentially thousands of pounds, often simply by strategic planning.

If you have significant investments, but don’t know whether you’re taking full advantage of all the options available, why wouldn’t you want to be sure?

If you’re worried about your children having to pay tax on your death, why wouldn’t you reassure yourself by asking a professional? Then you wouldn’t have to worry.