Invest £10,000 in a pension – get up to £4,000 back from the Government

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Pension: Expert discusses tax relief on contributions

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The Government is keen to get us all saving for retirement and a key way of doing that is by offering tax relief on our pension contributions. How much you receive depends on your contributions and tax bracket, but can total thousands of pounds a year.

If you fail to invest in a pension, you are making two major errors. First, you are building up financial problems for when you retire, because nobody wants to scrape by on the state pension alone.

The new state pension is currently just £179.60 a week, which adds up to just £9,339 a year. That is roughly a third of the average full-time national salary, and you only get that if you qualify for the full amount.

Second, by failing to invest in a pension you are throwing away some of the most valuable tax benefits of all. HM Revenue & Customs lavishes pensions savers with rare generosity, so take advantage if you can.

Every year, HMRC hands out almost £40 billion in tax relief on personal and workplace pension contributions, so act now to get a share of that largesse.

One of the most popular ways to save for retirement is through something called a self-invested personal pension, or SIPP.

SIPPs allow you to invest in thousands of stocks and funds, as well as cash, bonds, gold or commercial property.

They work best for those with larger pots who are comfortable making their own investment decisions.

Low-cost SIPPs are sold by a range of online platforms, including Aegon, AJ Bell, Canada Life, Hargreaves Lansdown, Interactive Investor and PensionBee.

As with other personal pensions, you can claim tax relief on contributions equivalent to your annual salary, up to a maximum £40,000 a year.

When you pay money in, HM Revenue & Customs automatically applies basic rate tax relief at 20 percent.

This is paid as a percentage of the total amount that goes into your pension. So if you pay in £8,000 HMRC tops that up to £10,000. You get 20 percent of that total sum, or £2,000.

The same applies if you pay in a smaller sum, so £800 is topped up to £1,000.

Tom Selby, head of retirement policy at AJ Bell, said higher and additional rate taxpayers can reclaim a further 20 or 25 percent relief on their self-assessment tax return.

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HMRC pays the extra tax relief money directly to you, usually by making an adjustment to your tax code.

Selby said: “A higher-rate taxpayer who put £8,000 into their pension would get £2,000 added to the pot, and a further £2,000 as a tax rebate from HMRC.”

This means a £10,000 total SIPP contribution would only cost a higher-rate taxpayer £6,000. Additional rate 45 percent taxpayers pay just £5,500.

Selby cautioned that you cannot access money in your pension until you are at least 55 (rising to 57 from April 2028). “If you want access to your savings before that, then consider investing in a tax-efficient Isa instead.”

Pensions offer further tax benefits. From age 55, you can draw 25 percent of your pot as a tax-free lump sum.

Any money left when you die escapes inheritance tax, making it a tax-efficient way of passing money onto loved ones, too.

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