The UK offers full tax relief for contributions to a private pension scheme. This is most effective if your employer pays directly into the scheme rather than you paying out of Net income. By asking your employer to make payments direct not only do you save the tax but you also both save the NIC. For your employer this is significant.
You can join your employer's pension scheme or pay into a private pension scheme. Often employers will match your contributions to a company scheme so especially worth considering if the option is available to you.
In practical terms any pension contributions made by your employer come off your pay before taxation so offers the simplest and best tax effect. If you pay the contribution after taxation you need to claim the relief in your tax return and the NIC saving opportunity is lost.
In the UK the earliest age you can draw from the pension is 50 years (raised to 55 from 6 April 2010) but at this time you can take a 25% lump sum tax free and in the meantime the value of your fund continues to grow tax free. Most pension fund value can be transferred to another scheme if you leave the UK. This means someone over the age of 50 can make the contribution to get the tax relief and immediately draw the 25% lump sum tax free.
If you invest in a SIPP or Self-invested personal pension scheme you can draw a loan on your pension fund of up to 50% which partly removes the concern over tying money up into a pension fund until retirement age.
