‘Quicker and easier’ method to save for retirement
Pensions: Man could have 'retired at 55' before losing pension benefits
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Most people will want to make sure they have as much money as possible for retirement. Leaving the workforce means departing from a regular salary or wages which could be unsettling in terms of finances.
Therefore, apart from the safety net of a state pension, many people will be saving into their own workplace or private arrangement to help them.
Often considered the key advantage of saving into a pension, tax benefits can make a real difference.
For most pension arrangements, this will be tax relief, described as a “hidden hero” for savers.
When paying into a pension, some of the money that would’ve gone to the Government as tax instead goes towards a person’s savings.
It can provide a well-needed boost as well as an incentive to save.
Standard Life explained most people will automatically get tax relief at the basic rate of 20 percent.
This is because it is based on the rate of income tax a person pays.
However, higher or additional rate taxpayers might need to claim back anything above 20 percent from the Government.
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Standard Life added: “Depending on your plan, tax benefits can work differently to what we’ve described.
“If you’re part of a salary sacrifice or salary exchange scheme, for example, you might get tax benefits in a different way.
“But the idea’s the same – you can get a financial boost from the Government, which can make it quicker and easier to increase your pension pot’s value.
“This may be particularly reassuring if you started saving a bit later in life.”
People can get tax relief on private pension contributions worth up to 100 percent of their annual earnings.
However, it is up to the individual to ensure they aren’t getting tax relief on more than this.
If it is found they are, then HM Revenue and Customs (HMRC) can ask people to pay back anything over this limit.
Individuals will not be able to claim tax relief if their pension scheme is not set up and registered with HMRC.
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If the scheme is not set up for automatic tax relief, then Britons will need to be proactive about the matter.
They can claim their tax relief through a Self Assessment tax return in this circumstance.
Those who do not pay income tax may also still benefit from pension tax relief.
These people still get automatic tax relief at 20 percent on the first £2,880 they pay into a pension each tax year.
However, both of the following must apply:
- A person does not pay income tax, for example, because they are on a low income
- A pension provider claims tax relief for the person at a rate of 20 percent through relief at source.
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