Personal Pension Contributions
Although there is now a single regime governing all “tax-privileged” schemes, which replaced the various rules governing personal pension contributions, retirement annuities and employer pension schemes, pension contributions can still be a complex area.

To qualify a pension scheme must be registered with HMRC and, once approved, it is exempt from income tax on its investments and from capital gains tax on the disposal of its investments.

Tax Relief on Contributions
Contributions to a registered scheme are no longer limited by reference to the payer’s earnings and there is no earnings cap. A UK resident individual aged under 75 can make unlimited contributions and is entitled to tax relief on contributions up to the amount of his or her earnings in the tax year of payment.

Method of relief
How tax relief is given depends on the way in which the contributions are made and the type of scheme.

In the case of employer schemes, tax relief may be given under “net pay” arrangements, where the gross amount of the contribution is deducted from the employee’s earnings before tax is deducted, so giving full tax relief at source.

In the case of some schemes (generally retirement annuity schemes), contributions are paid gross in which case tax relief is given either by an adjustment to the individual’s tax code or through his tax return, by deducting the amount paid the individual’s total income in calculating his income tax liability for the year.

Most personal pension/stakeholder schemes operate basic rate tax relief at source. This means that the individual obtains tax relief at the basic rate by paying the net amount to the pension provider; where higher rate relief is available this is claimed through the individual’s tax return as an reduction to his tax liability for the tax year of payment (or by an adjustment in his PAYE tax code).

Where a scheme operates tax relief at source and an individual’s earnings are less than £3,600 in a tax year, net contributions of up £2,880 (£3,600 – 20% x 3,600) will also attract tax relief at the basic rate.

Pension contributions can no longer be carried back or forward to tax years other than the year of payment.

Annual and Lifetime allowances
Each individual has a Lifetime Allowance, which is £1.5 million from 2012/13 and £1.25m from 2014/15 (reduced from £1.8 million previously). When a pension begins to be paid, the amount in the scheme is measured against the individual’s lifetime allowance and any excess taxed at 55% if taken as a lump sum and 25% in other cases. Any tax due may be deducted by the administrator from the individual’s benefits

There is also an Annual Allowance reduced from £255,000 to £50,000 from 2011/12 and to £40,000 from 2014/15. To the extent that the annual increase in an individual’s rights under all registered schemes of which he is a member exceeds the annual allowance, the excess is treated as being the “top slice” of the individual’s income for that year and is taxed accordingly.

If the annual allowance for any year exceeds the amount of pension contributions for that year, then the excess “unused” annual allowance can be carried forward for up to three years and used against contributions made in those later years.

Taking a pension
The minimum pension age rose from 50 to 55 with effect from 6 April 2010. Subject to some specific exemptions and transitional provisions, a pension cannot be taken before the minimum age and must be taken by the age of 75.

An individual will generally have the option to take part of his pension fund as a tax-free lump sum, with the rest payable as a monthly pension. The maximum lump sum is generally the lower of 25% of the total value of the individual’s pension scheme(s) and 25% of the remaining unused £1.5 million lifetime allowance.

Pension income, including the state pension is taxable; in many cases, the state pension is set against the individual’s personal allowance as an adjustment in the tax code to be operated against other pension income.

Although one regime exists for all forms of pension scheme, this remains a complex area and professional advice should be sought when planning for retirement.