Tax allowances

Pensions enjoy certain tax privileges and it is for this reason that tax legislation has such a strong bearing on shaping the benefits provided by pension schemes such as the Telefónica UK Pension Plan. The tax savings under the Plan are:

• Your contributions are free of income tax which saves you 20% on the cost of your pension if you are a basic rate tax payer and 40% if you are a higher rate tax payer;
• Investment growth is partially free of tax;
• Lump sum payments on death are usually free of inheritance tax;
• On retirement, you can take up to a quarter of your entitlement as tax free cash; and
• You may also save National Insurance on your contributions, see salary sacrifice.

To benefit from these tax privileges the Plan has in place limits on benefits that can be paid. There are also limits on the amounts of savings you can make and still enjoy the tax privileges. This section details your limits.

From 5 April 2006, also known as A-Day, the existing Inland Revenue limits on benefits and contributions were replaced with a new set of simplified limits. Three tax-free allowances will now apply to benefits and contributions in all types of pension scheme.

These are legislative allowances in regard to the tax efficient benefits through all schemes registered with the HMRC (Her Majesty's Revenue and Customs). The actual benefits provided by a pension scheme remain in accordance with the rules specific to that scheme.

The three tax-free allowances are:

• Lifetime allowance (an allowance on the total value of your pension saving).
• Annual allowance (an allowance on the amount of increase to your fund over the tax year)
• Cash allowance (an allowance on the total amounts of tax free cash you can take at retirement).

It is important to understand these limits in order to ensure that your pension savings are tax efficient. Explore the links to find out more.