Hidden Tax Advantages You Can Gain From Workplace Pension

hidden tax advantages workplace pension

Pensions come with a mix of tax benefits that can help you boost your retirement pot. Hence making out of them is paramount. However, you must be careful when taking pension benefits or find yourself with an unnecessary tax bill. So before you take any pension benefits, it's essential to seek advice about the tax or any other financial decisions from a financial adviser. With adequate knowledge, there are several advantages your workplace tax on pension can offer. 

Tax-Free Investment Fund 

When you invest your contributions to your pension scheme, your investment will likely grow free of taxes. This kind of favorable tax treatment enables your pension funds to grow faster than other taxable investment funds. However, like other investments, you are eligible to pay dividends on shares in your pension scheme with about 10% tax credit deducted. Unfortunately, these amounts can't be reclaimed. 

Pension Contributions Tax Relief 

The more you contribute to your pensions, the more you enjoy tax relief on what you give. However, because this tax relief is generous, there are some limits beyond which you can't contribute to a pension. 

Tax-Free 25% Lump Sum From Age 55 

Once you attain a minimum eligibility age of 55, you can get a tax-free lump sum out of your pension up to 25% of its final value. However, if you die before the age of 75, then any pension is passed on tax-free to your beneficiaries. The inheritor will spend the money without incurring any tax bill, provided it's within the two-year time frame. But when the two-year period has passed following death, any payment is categorized under an un-crystalized death benefit. The money will therefore be subject to the Special Lump-Sum Death Benefit Charge. In other words, the death benefits are tax-free if death occurs any time before the 75th birthday. 

No Inheritance Tax On Death 

With limited contribution pensions, the age at which you die determines whether your pension is passed on to your beneficiaries without inclusion in your estate for inheritance tax purposes or not. Suppose you lose your life beyond the age of 75 onwards before you started taking pension benefits. In that case, the value of your pension can generally be passed to any beneficiaries and taxed based on their marginal rate of income tax. However, these tax rates differ if the payment is not going to an individual. Besides, Inheritance tax is only liable on any cash that has been withdrawn from a pension but not spend on death. So, in short, the money is subject to tax if you die after age 75. However, the tax rate here is subject to the terms and conditions of the annuity policy. 

Pension Potential

The personal tax system is essential in old-age financial support. Once you successfully retire from the workplace, you will enjoy a pension without paying social security contributions. In addition, pension taxis often are progressive, and pension entitlements are usually lower than earnings before retirement. Therefore the average rate of tax on pension is often less than the tax rate on overage income.
