Tax relief is generally obtained at your marginal income tax rate on contributions up to an annual allowance, plus any unused relief available from the three previous tax years.
Pensions are a useful wealth succession tool and there is a current incentive to maximise contributions given the changes for high earners from April 2016 – those approaching retirement may even consider bank borrowing to achieve this. Exactly how much can be contributed and when will depend on the pattern of historic contributions, number and types of pension schemes an individual is a member of, whilst also being subject to the lifetime allowance limit.
In a range of measures introduced to simplify and provide increased flexibility, from 6 April 2015 those aged over 55 can withdraw cash from the pension fund and pay tax at their marginal rate. In particular, people who die before age 75 can pass on the pension fund tax free, without any restrictions. When someone dies over the age of 75, the fund can be withdrawn in stages and taxed at the beneficiaries’ marginal income tax rates, rather than being subject to an immediate 55 per cent tax charge.
There are special rules affecting pension contributions from 6 April 2016, which will reduce the lifetime allowance to £1m and reduce the annual allowance for those with income above £150,000. Pension planning can be complicated and it is recommended professional advice is sought, especially in the light of these new rules.