How do immediate pensions work?
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 personal pension account. If you have earnings, you can contribute up to that level, with an overall limit equal to the annual allowance which is currently £50,000 but will reduce to £40,000 in 2014/15.
An investment of £3,600 will actually cost you only £2,880 because all Personal Pension Account 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 through your annual tax return.
If you take your investment as an immediate pension and 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. However, the income you receive is subject to tax, unless your total income is less than your personal tax allowance. The personal tax allowances for 2013/14 are:
- £9,440 for those under 65
- £10,500 for people aged between 65 and 74
- £10,660 for those over 75
ARRANGE AN APPOINTMENT
The income you receive is subject to tax, unless your total income is less than your personal tax allowance.
However, the tax treatment of pensions depends on individual circumstances and may change in the future.