Do I get tax relief from the government?
Yes – the government rewards people for saving into a pension by essentially ‘giving back’ the income tax that you paid when you earnt that money originally. This means the money you contribute to your pension will usually receive a 25% tax top up contribution from HMRC.
1. If you are a basic-rate taxpayer, you will receive this 25% tax top up contribution from the government only. For example, if a basic-rate taxpayer makes a £1000 contribution into their pension, they will receive a £250 tax top up contribution from the government back into their pension.
2. If you are a higher-rate taxpayer, you can claim an additional 41% tax top up contribution from the government, as part of your annual tax return. This means you receive a total 66% tax top up contribution. For example, if a higher-rate taxpayer makes a £1000 contribution into their pension, they will receive a £250 tax top up contribution from the government back into their pension.
Do pensions have high interest rates?
A pension is a savings vehicle, and all the money you put into it gets a massive boost from the government through tax relief. This is the biggest boost of any savings product out there, which makes pensions such a great way to save for later life.
But your money should get another, even bigger boost. Everything that you save up into a pot is then invested. The aim of this is to grow your money more than by leaving it in a bank account. Investing your money sensibly can help it grow by around 5-7% per year on average over the long term. That might not sound like a lot, but if your money grows at 7% every year for 30 years, it would have grown by 760% over that time thanks to compound returns.