How does it work?

You currently need to be aged 55 or over and under age 75 to take out an immediate pension. Even if you don't have any earned income and don't pay tax, you can still benefit from an immediate pension. You could even have retired already and still qualify.

Regardless of your level of earnings - or even if you have no earnings at all - you may be able to contribute up to £3,600 gross this tax year into a stakeholder pension. If you have earnings, you can contribute up to that level, with an overall limit equal to the annual allowance of £50,000.

An investment of £3,600 will actually cost you only £2,880 because all stakeholder contributions are payable net of 20% basic rate tax, whether you are employed, self-employed, not in work or even retired.

The Government will add the tax of £720 into your pension fund.  If you are a higher or additional rate taxpayer you are able to claim further tax relief, of up to £720 or £1080 respectively, through your annual tax return.

The tax treatment of pensions depends on individual circumstances and may change in the future.

You can take the benefits immediately

If you take your investment as an immediate pension, if you have invested £3,600, you can choose to take up to £900 in tax-free cash with the balance of the fund going to buy a guaranteed income for life.

Like all pensions, the income you receive is subject to tax. However, if your total income is less than your personal tax allowance there would be no tax to pay. The current personal tax allowances are listed below:

• £8,105 for those under 65
• £10,500 for people aged between 65 and 74
• £10,660 for those over 75

Why stop at one pension?

Why not set up a series of immediate pensions? The beauty of this is that you can go on contributing up to £3,600 gross to a stakeholder and taking the benefits immediately every year from age 55 to age 75. By doing so you can build up a growing level of income. (Note: this income will be taxable)

Generating Income FAQ

Find out about more about generating income in retirement with our frequently asked questions.