How to make the most out of your pension contributions

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Saving into a pension is a fantastic way of putting money aside for your retirement. You might not realise it, but every time you pay in money you get a bonus from the government called tax relief.

In this article we'll explain how pension tax relief works, how much money you can pay in each year, and the tax rules around retirement.

Tax relief basics

Tax relief is essentially free money from the government – a reward to you for saving for your future. Essentially the money that you would have paid the government in tax is put into your pension instead.

If you're a UK taxpayer then you'll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower. Any contributions you make over this amount won't attract tax relief.

Carrying forward contributions

It's possible to “carry forward" any unused annual allowance from the previous three tax years, as long as you were a member of a pension scheme during that time.

To do this, you must make the maximum allowable contribution in the current tax year (£40,000) and you can then use unused allowances from the previous three.

It's important to bear in mind that you must have earnings of at least the amount you're contributing to your pension, so if you're paying in £160,000 you need to be earning £160,000 or more.

Pension credit can boost your state pension

If you're on a low income you could be missing out on hundreds a year by not claiming pension credit.

Pension credit has two parts;

  • Guarantee Credit: This tops up your weekly income to a fixed level of £173.75 if you're single, and £265.20 if you're married or in a civil partnership

  • Savings Credit: Provides extra money if you've made some savings towards your retirement. You'll receive £13.72 a week if you're single, and £15.35 a week if you're married or in a civial partnership. You won't be eligible for Savings Credit if you reach State Pension age on or after 6 April 2016.

Tax at retirement

Under current rules, many pension plans will allow you to start withdrawing your pension money when you reach age 55.

When you make a withdrawal you can take 25% of your pension pot tax-free – either as one lump sum or as smaller chunks over time.

The remaining 75% of your pension withdrawals are subject to income tax.

If you take your tax-free amount as a lump sum, you then have three options:

  1. Buy an annuity, which pays out a guaranteed income for life

  2. Get an adjustable income through “flexi-access drawdown" – this is where you invest your pension pot into funds designed to pay out a regular income

  3. Take the whole pot as cash

Choosing how you withdraw your pension money is an important and complex decision, so it's best to seek out a pensions advisor.

Once you're 50 or older you can book a free appointment with Pension Wise, which will offer impartial guidance on your options. You can also pay for financial advice from a specialist retirement adviser.

The Pension Wise website ( and Pension Advisory Service website ( are good places to get more information on pensions and tax.

Our articles cover a wide range of mainstream financial products and employee benefits. Terms and conditions may vary depending on your provider. Please ensure you check the specific terms and conditions of any financial products and employee benefits available to you from your employer.