Tax savings: Your pension can grow faster with a tax break

The most tax-efficient way to save for retirement is through a pension scheme. With the state pension now worth just 16 per cent of average male earnings, and expected to fall to under 10 per cent in 30 years' time, all of us will need an additional pension if we are to manage in retirement.

Yet more than eight million people currently have no private pension arrangements, many of these are unemployed or low paid, and it is these people the Government is particularly targeting with its plans for a stakeholder pension scheme, to be published in a green paper in the first half of this year. These pensions are expected to be low cost, accept small amounts of money and have attractive tax incentives.

Contributions into existing private pension schemes already attract generous tax treatment. "This is unlikely to change," says Adrian Boulding, pensions strategy director at Legal & General. "Pensions will always be the most tax-efficient of savings schemes. The Government will always have to offer extra incentives on pensions to encourage people to think long-term," he says.

Regardless of whether you are in a company or personal pension scheme, your contributions will be tax free providing you do not exceed the set limits. You can contribute up to 15 per cent of your salary into an occupational pension scheme each year on top of any contributions from your employer.

Maximum annual contributions into a personal pension are based on your age. The under-35s can invest up to 17.5 per cent of their salary each year. This rises to 20 per cent at ages 36 to 45, with the top tier being 40 per cent at age 61 and over.

If you are in an occupational scheme, your contributions will be deducted from your gross salary. If you are in a personal pension scheme, you will have to make your own contributions. These will be made from your net (i.e. taxed) income but the pension provider will then reclaim the tax you have already paid on this money and then invest it in your pension.

Vivienne Starkey, a senior consultant at independent financial advisers, Haddock Porter Williams, points out that the tax breaks on pension contributions enable your pension to grow at a much faster rate than with any other investment.

Abigail Montrose