What is an immediate pension?

An immediate pension is a facility that allows people over 55 to make an investment into a stakeholder pension and start taking the benefits straight away.

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.

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 rate taxpayer, you are able to claim up to an additional £720 tax relief through your annual tax return.

The 2009 Budget restricted tax relief on pension contributions for those earning £150,000 or more a year. In the December 2009 pre-budget report, an anti-forestalling limit was introduced to include those earning between £130,000 and £150,000 during the 2009/10 and 2010/11 tax years. Thus some individuals may currently have income below £130,000 – in fact they may even be basic rate tax payers – and still qualify as a high-income individual. All taxable income must be taken into account, including earned income, dividends and salary sacrificed for pension contributions after 22 April 2009.

HMRC have introduced a new special annual allowance of £20,000, or up to £30,000 where the average of infrequent money purchase contributions exceeds £20,000. Payments which do not exceed this amount within one tax year are not affected. Any pension payments made by high-income individuals, which exceed the special annual allowance and are not otherwise protected, will be subject to a special annual allowance charge which is intended to effectively limit tax relief on these payments to the basic rate.

The anti-forestalling provisions only apply to tax years 2009/10 and 2010/11 but the Government confirmed in the 2010 Budget that they were considering how to continue applying the high income test, including the previous two years income, after 5 April 2011.

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:

	£6,475 for those under age 65
	£9,490 for people aged between 65 and 74
	£9,640 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.

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