Pensions and Tax Benefits

If saving for your twilight years does not seem motivating enough then the government is certainly doing its part to make it motivating for you.

Saving in a pension is one of the best ways to build up a retirement income in a tax-efficient manner.

Funds that go into your pension are looked upon leniently by the taxman. But there are annual as well as lifetime limits on how much tax relief you can get.

It pays to plan smartly and choose your options correctly to ensure that you maximize the benefits.

Understanding Tax Relief

In the year 2015-2016, the HM Revenue & Customs (HMRC) provides tax relief on pension contributions up to 100% of your earnings. The upper limit is £40,000.

To simplify things, here’s an example.

  • If you earn £25,000 and you contribute £30,000 into your pension pot by adding additional income sources, then you will only get tax relief on £25,000 (100% of your earnings)
  • On the other hand if you earn £80,000 a year and put the entire amount into your pension pot, you will only receive tax relief on £40,000 (The upper limit)

While you are enrolled in a pension scheme, you can carry forward unused tax allowances from the past three years.

However, if you are enrolled in a Defined Contribution Pension, then according to the new Pension reforms introduced in April 2015, then your contributions can be reduced to £10,000 in some cases.

The Money Purchase Annual Allowance

If a pension scheme member chooses to flexibly access the funds in their pension pot, it triggers the MPAA or Money Purchase Annual allowance which in effect, reduces the annual allowance to £10,000.

This means, if you take the tax-free cash or withdraw funds from the pension pot, you will then receive tax-relief only on £10,000 or 100% of your earnings, whichever is lower.

The MPAA has been drafted to prevent abuse of the flexibility options that a pensioner has.

Some situations in which you may trigger the MPAA are:

  • If you start to make random cash lump sums from your pension
  • If you invest in an income drawdown scheme and start to utilize the income

However, the MPAA limit only applies to defined contribution pensions.

Personal Pensions

If you have enrolled in a personal pension scheme then your income is taxed before your contributions are made into it.

You are eligible to get tax relief on up to 100% of your annual earnings.

The tax relief is automatically applied if your pension provider adds a 20% relief to your pension pot (relief at source).

You can claim additional tax relief if you pay above the basic rate of tax which is 20%.

For example:

  • If you pay 40% income tax, you can claim tax relief on the extra 20%.
  • If you pay 45% income tax, you can claim tax relief on the additional 25%

This claim can be made via a self-assessment form at the end of each tax year.

Company or Workplace Pensions

If you are enrolled in a workplace pension scheme, then the tax relief applicable to you depends on the type of scheme. In most cases, you may not have to do anything and it will all be set up by your employer.

Additional Voluntary Contribution Schemes and Money Purchase Pension Schemes give you instant tax relief as the contributions to the pension fund are paid before the income is taxed.

If you have enrolled in a Salary Sacrifice Scheme, then you will not be eligible for tax relief. But, it allows you to save on income tax and your NI (National Insurance) contributions since you opt for a reduced salary in exchange for contributions to your pension scheme.

Stakeholder and Group Personal Pension Schemes work in the same manner as Personal Pensions do.

Tax Relief for Non-Tax Payers

If you do not earn sufficient income to pay income tax, you can still receive tax relief on any contributions you make towards a pension fund with an upper limit of £2,880.

The taxman will top this up with a 20% contribution making the total amount £3,600. Every penny you add to the pension fund above this amount will be taxable.


What is Binary Options Trading?

You could earn a quick profit by trading in binary options. However, you could also lose your money just as fast. Here is a guide on how it works.

What is it?

Rather than investing, Binary Options Trading is a type of gambling, where you trade on an asset increasing or decreasing in value within a set time.

How it works

When you perform a trade in binary options, you decide how long the trade will last. Then if you are right, you are told what your possible return will be.

This implies that you earn a fixed amount if your trade wins, unlike investments.

There are three possible outcomes:

  • If the asset’s value is the same, you get your money back
  • If you are right, you earn a profit
  • If you are wrong, you lose the money that you traded

Some companies give potential returns that would double your money. But the greater the potential return is, the riskier the trade.

What you can trade on

You can trade binary options on several assets, including:

  • Currencies (forex): Currencies are always traded in pairs, e.g. USD/AUD
  • Indices: e.g. DAX30 (Germany), the FTSE 100 (UK), and S&P 500 (US)
  • Commodities: e.g. energy and metals
  • Stocks: This is the value of the shares of  company

Pick a type of trade

There are various ways to trade binary options, and how you make money from them differs:

  • Range: You bet on whether or not a market price will close within a set range. If at the end of the time you are right, you make a profit.
  • High/low: You bet on whether the market price at expiry will be higher or lower than the market price you started with.
  • No touch: This is the opposite of one touch. You bet on the price not reaching the target within the time.
  • One touch: You get a target price, which can be higher or lower than the starting price. You bet on the price reaching the target within the time.
  • Ladder: You make several bets at once, with different expiry times. This means you could get partial payouts if some of the bets go in your favour.
  • Pairs: You bet on the price of two assets, e.g. gold against silver. If you think gold will outperform silver, you bet up. If you expect silver to perform better, you bet down.

Depending on the company, you could decide to trade in binary options that last just for 60 seconds, or as long as several months.

Is it regulated?

All UK-based binary options companies are regulated by the UK Gambling Commission, instead of a financial regulator.

This is because trading in binary options is a manner of gambling, instead of an investment.

Binary option companies that are located overseas do not require a Gambling Commission Licence to trade, so you should try and avoid them if possible.

See also: How to Trade in Binary Options