Employees earning less than £95,400 a year can put up to 40 per cent of their salary into their pension, depending on their age (see table below). The amount they contribute is then not taxed.
Put very simply, an employee earning £25,000 who puts £2,000 per year into a pension will only be taxed on £23,000. If they were paying tax at a rate of 22 per cent the saving would be 2,000 x 22 per cent = £440 in tax.
This is one of the biggest tax breaks on offer, for the very good reason that the government is desperate to encourage employees to start saving for their future.
The maximum amount that can be paid into a pension fund varies with age (on 6 April of that financial year):
|35 or less||17 per cent|
|36 to 46||20 per cent|
|46 to 50||25 per cent|
|51 to 55||30 per cent|
|56 to 60||35 per cent|
|61 to 74||40 per cent|
How do I go about claiming the tax relief?
Any payments made through your payroll will automatically qualify for the tax relief. Your payroll administrators will calculate this. You need to do nothing at all; it will all be done for you.
What are AVCs?
Additional Voluntary Contributions are an extra savings facility to give you a simple and tax-efficient way of topping up your retirement benefits to suit your personal circumstances.
You should consider paying AVCs if you:
- Have not had the opportunity to join a pension plan from the start of your career
- Plan to retire before your normal retirement age
- Have taken career breaks (e.g. for further education or family reasons)
- Would like to provide extra pension for yourself, your spouse or another dependant
Safeguards to protect your pension investment
Pension Funds are probably most employees' biggest savings fund. It is estimated that over 65 per cent of the FTSE 100 companies are owned by Pension Funds. Not surprisingly these funds are very heavily regulated to stop abuse.
Trustees run the funds, and are responsible for ensuring that the fund is properly invested, managed and paid out to the right people at the right time.
Every Pension Fund must appoint an Actuary. Actuaries are very highly specialised professionals who will assess how much the fund will need to pay in the future. They do this by looking at when the contributors are likely to die and then calculate backwards to work out the size of the pension fund needed to meet this liability. They also take into account projected investment returns.
The actuary is required to report to the trustees each year. The trustees then rely on this report to identify whether the fund is sufficient.
Each employee has the right to be kept informed of how well the fund is performing. Every year they should receive a statement informing them of the fund's performance and showing how much the employee will be entitled to on retirement.
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