The tax legislation affecting pensions has seen a lot of changes in recent years and left many people confused as to what level of contributions can be paid and what tax relief premiums will attract. The changes would not appear to have finished yet, with more announcements expected in the 2011 budget.

Many people have stopped investing in pensions due to the uncertainty surrounding the changes. However, pensions can still be a very tax efficient way to save for retirement.

If you are employed or self employed, you can contribute up to 100% of the value of your relevant United Kingdom earnings (salary and other earned income), up to a maximum of £255,000 for the 2010/11 tax year.

Contributions above this annual limit are allowed but will be taxed. You can contribute into any number of pension schemes (personal and/or company) in each tax year.

You will receive tax relief on your allowable contributions, so if you are a higher rate taxpayer a qualifying £10,000 premium would cost just £6,000. Basic rate tax relief is added by the government to all contributions, currently at a rate of 20%. Higher rate tax payers claim the additional relief via their self assessment tax returns.

At present under legislation introduced by the last Labour Government, if your relevant UK earnings exceed £150,000 you will see the tax relief on your pensions cut from April 2011, with tapering from 40 to 20 per cent for those earning more than £180,000. Earners below £130,000 will not be affected. However, it is here that changes are being considered.

In the emergency budget in June this year the Chancellor of the Exchequer announced he was considering amending the above legislation and introducing a revised system of restricting pension relief. The principal suggestion was to significantly reduce the annual allowance (currently £255,000) and abolish the above high income excess charge.

Watch this space for further information once detailed proposals are announced.

There is a lifetime limit on the size of your pension funds currently £1.8million in the current tax year. If your fund exceeds this amount you will incur tax charges of 55% if the excess benefits are taken as a lump sum and 25% if taken as income. The income will then be charged to income tax at your highest rate.

From 6th April 2010, the age at which you can start to draw a pension was raised to 55. If you need to your pension can be deferred until you are up to 75 years old. For those who meet certain circumstances (eg. having to retire through ill health) they may be able to claim any pension entitlement before 55.

If you have a personal pension in most cases when you retire you will have to purchase annuity from an insurance company. It is important that you consider all options when purchasing your annuity as once bought annuities cannot be switched to another provider. Every pension provider has to offer you an Open Market Option. This will enable you to choose from which insurance company you buy your annuity.

It is essential to remember at every stage to seek professional advice before acting.

TaxWise is available to help answer any tax queries. Just call the Advice Service on 01455 852555 and one of our specialists will be happy to help.