Tax relief on contributions

All allowable contributions to pension plans enjoy tax relief at your marginal rate of tax. This means that a basic rate tax payer who wants to contribute £ 1,000 in to a personal pension will only have to actually invest £ 780 because the tax relief is £ 220. Higher rate tax payers can claim a further 18% tax relief through their self assessment.

If you are making personal contributions you can pay the net amount and the SIPP provider will recover the tax relief. However all employer contributions are paid gross and the employer will claim tax relief through the company.

Lifetime Allowance

There is a limit on the value of retirement benefits that you can draw from an approved pension schemes before tax penalties apply. That limit is called the Lifetime Allowance. This is £1.75m in the 2009/10 tax year and the following table shows the Lifetime Allowance for past and future tax years.

The Lifetime Allowance - 2006/07 to 2010/11
Tax Year	Lifetime Allowance
2006/07	£1.50m
2007/08	£1.60m
2008/09	£1.65m
2009/10	£1.75m
2010/11 to 2015/16	£1.80m

At the time of payment, a recovery charge will be applied to the value of retirement benefits in excess of the Lifetime Allowance. The amount will depend on how the excess is paid.

If it is paid in the form of a pension, the excess will be subject to a 25% tax charge and the income will be subject to Income Tax. For example, if you had a pension fund of £2.15 million in 2009, £400,000 would be subject to the tax charge of 25% (tax due £100,000) leaving £2.05 million to provide an income.

If the excess is paid as a lump sum, it will be subject to a one-off 55% recovery charge. For example, if you had a pension fund of £2.15 million in 2009, £400,000 would be subject to the tax charge of 55% (tax due £220,000), leaving a lump sum of £180,000.