Paying into your pension
You can pay as much as you like into your pension schemes, but tax relief limits apply to your annual and lifetime contributions. These limits apply to both salary-related and money purchase pensions.
How much you can pay into your pension each year
You can pay as much as you like into your pension schemes. However, you’ll only get tax relief on up to 100% of your earnings if you are a UK taxpayer. For example if you earn £20,000 but put £25,000 into your pension scheme, you will only get tax relief on £20,000.
You can get tax relief on a limited amount of contributions if you are not earning.
In addition, there is an annual allowance which limits the amount of money you can put in each year. This limit is set by HM Revenue and Customs and changes each year. The limit for 2009/10 is £245,000. Any contributions you make over this limit will be subject to an annual allowance tax charge which is currently 40%. The annual allowance will increase each year until 2010 when the position will be reviewed by the government.
How much can you build up in your pension?
There is a lifetime allowance which limits the amount you can accumulate free of tax in all your pension funds when you come to draw your benefits. This is £1.75m for the tax year 2009/10. You have to pay tax on any excess over the £1.75m allowance.
Salary-related pension scheme benefits are given a value which counts towards the £1.75m lifetime allowance.
Any amount above the lifetime allowance can be paid as a pension benefit but is subject to tax of up to 55%. You may still have to pay tax on your income when you start to draw the pension.
How much should you pay into a money purchase pension?
What you pay into a pension plan depends on what you can afford. It can be anything from as little as £20 a month to your monthly salary, if you wish. The earlier you start the better. This is because the more time your savings have to grow, the bigger your pension is likely to be.
Use our Pension calculator to see what your pension fund could be worth at retirement using the amount you can afford to pay in. Just enter the amount you can contribute and it will calculate what your pension fund could be worth if it grows at certain rates each year.
The figures you see in the Pension calculator are estimates – they are not guaranteed. The actual pension income you receive will be affected by future changes in things like interest rates, inflation and investment growth.