Tax-relief on your payments
When you pay money into a pension, you get tax relief. A basic-rate taxpayer gets 20% tax relief on their pension payments, a higher-rate payer 40%, and an additional rate payer 45%. So, as a basic-rate taxpayer, for every £80 you pay into a pension, you get an extra £20 from the government, which means £100 is actually being invested for your retirement.
Tax-efficient growth when you’re saving
Your pension fund grows largely tax-free, which can help to boost the amount you have in your pension plan. Remember that the value of your fund can go down which affects how much you’ve got in your pension plan, resulting in less income when you retire.
Tax-free money – you can take up to 25% of your savings back tax-free
You can currently take up to 25% of your pension savings as a tax free sum. What you do with it is entirely up to you – except for one thing: you can’t put it into another pension plan. Otherwise, you’re free to spend it – or save it – anyway you please.
That leaves 75% or more in your plan which is taxable when you take it, but taking the tax-free sum will reduce the amount available to provide an income in retirement.